ANNUAL REPORT 2019 In the event of conflict in interpretation or differences between this annual report and the Swedish version, the latter will prevail.

2 VOLVOFINANS BANK 2019 SUMMARY JAN–DEC 2019

Operating profit, SEKm Return on equity 600 12%

500 10%

400 8%

300 6%

200 4% 408 502 516 8.8% 10.1% 10.7% 100 2%

0 0% 2017 2018 2019 2017 2018 2019

Common Equity Tier 1 capital ratio Credit losses/lending 25% 0.10%

20% 0.08%

15% 0.06%

10% 0.04%

5% 20.6% 18.1% 19.4% 0.02% 0.05% 0.03% 0.04% 0% 0.00% 2017 2018 2019 2017 2018 2019

VOLVOFINANS BANK 2019 3 ANNUAL REPORT 2019

INTRODUCTION AND FINANCIAL STATEMENTS

8 Message from the CEO Credit risks and credit losses 25 Appropriation of profits 10 Sweden’s Volvo dealerships 13 CAPITAL RAISING Capital base in 2019 Rating 26 Five-year summary 14 Events after the balance sheet date 12 Directors’ Report 28 Income statement Expected future developments Group structure 29 Balance sheet Corporate governance report Significant events 30 Changes in equity during the financial year 22 Sustainability report 31 Cash flow statement Information on risks and uncertainties 24 Personnel Volumes/lending Remuneration Earnings

NOTES

34 Note 1. Information about the bank Note 10. Net income/expense from 93 Note 27. Derivatives – Assets and Note 2. Risk and capital management financial transactions* liabilities 35 Credit risk Note 11. Other operating income 94 Note 28. Prepaid expenses and accrued income 37 Future regulations Note 12. General administrative expenses 95 Note 29. Liabilities to credit institutions 47 Counterparty risk 82 Note 13. Depreciation, amortisation and securities issued 48 Encumbered assets and impairment of property, plant and Note 30. Retail deposits and 49 Concentration risk equipment and intangible assets borrowings Market risk Note 14. Other operating expenses Note 31. Other liabilities 52 Currency risk Note 15. Net credit losses Note 32. Accrued expenses and Residual value risk Note 16. Appropriations deferred income Equity risk in other operations Note 17. Tax on profit for the year 96 Note 33. Subordinated debts Operational risks Note 34. Untaxed reserves 53 Pension risks Balance sheet Note 35. Equity Liquidity risk 85 Note 18. Chargeable treasury bills, etc. Note 36. Carrying amount by category of financial instrument and fair value 56 Strategic risks Note 19. Loans and advances to credit disclosures Reputational risks institutions 99 Note 37. Pledged assets and contingent Note 20. Loans and advances to 57 Capital adequacy analysis liabilities customers 64 Note 3. Accounting policies 100 Note 38. Operating leases 88 Note 21. Bonds and other debt 74 Note 4. Segment reporting securities Note 39. Subsequent events

89 Note 22. Shares and interests in Note 40. Related parties Income statement associates and other companies 101 Note 41. Specification to cash flow 78 Note 5. Netinterest income 90 Note 23. Shares and interests in statement Note 6. Lease income and combined net Group companies interest income Note 24. Intangible assets 102 Signatures of the Board Note 7. Dividends received 91 Note 25. Property, plant and of Directors 79 Note 8. Commission income equipment, fixtures and fittings, and 104 Auditor’s report Note 9. Commission expense lease assets 110 Board of Directors, auditor 92 Note 26. Other assets and senior executives

4 VOLVOFINANS BANK 2019 VOLVOFINANS BANK 2019 5 6 VOLVOFINANS BANK 2019 INTRODUCTION AND FINANCIAL STATEMENTS

VOLVOFINANS BANK 2019 7 INTRODUCTION

COMMENTS FROM THE CEO

Volvofinans Bank’s operating profit increased by SEK 14 million in 2019, to SEK 516 million. The return on equity also increased, to 10.7%. This is another record profit for the bank, achieved against a backdrop of slowing growth in the Swedish economy, which has not yet had a notable impact on our earnings.

e experienced another year of strong Volvofinans continues to make significant investments in preven- sales in the car market, with 356,000 car tive measures in cyber security and to ensure compliance with registrations – the third highest number to the provisions of the PSD2 Directive and Basel IV. In terms of date. The bank’s lending expanded by SEK efficiency, it is primarily in the area of robotic process automation 0.6 billion to SEK 37.9 billion as Volvo Cars (RPA) that we have been running concrete initiatives. We are Wsold 65,000 cars in Sweden, down slightly from 70,000 in 2018 automating monotonous, time-consuming processes, thus freeing due to longer delivery times. Instead, the main driver behind our up time and resources that our employees can devote to other increased earnings is the very strong used car market, which also tasks. In 2019, Volvofinans Bank introduced a number of robots in has a positive impact on earnings from our our administration. In addition to monitoring car sales business and resulted in reversals of what is happening in fintech, as a niche bank previous impairment losses. As I have noted for car users, or mobility – which is where previously, there are several reasons behind things are going – we also need to monitor the strong demand for used cars. They are what is happening on the technological front exempt from the higher tax on new cars and in the automotive industry. From the bank’s are a smaller investment if the customer is perspective, it is clear that electrification is uncertain about the choice of fuel, and they really taking off on a broad front. In 2019, just are also seeing growing demand from foreign over 40,000 rechargeable cars were sold, buyers, which is pushing up prices. accounting for 11% of the total market. For It is in our Fleet business area that 2020, BIL Sweden expects the figures to these effects arise, which explains why increase to 100,000 and 30%. our large-customer unit was able to post The year 2020 looks set to become record earnings of SEK 172.5 million. the first of several years of transition, from The segment is growing by over 5% both fossil fuel-powered vehicles to fully electric in terms of loan volume and contract “From the bank’s or hybrid vehicles. Yet we mustn’t forget numbers and is thereby consolidating its perspective, it is clear that Sweden has nearly 5 million passenger market-leading position. By far the bank’s cars in use, which means that fossil fuels largest business area, Cars, reports earnings that electrification is will remain the dominant fuel in use on our of SEK 324 million, which is in line with really taking off on roads. Whatever the situation, Volvofinans last year (2018 adjusted for extraordinary a broad front” Bank looks forward to financing a growing income). This segment includes our card share of electric vehicles, and later this year business and the CarPay app, which we will see the first financing contracts for had a negative impact on earnings after Volvo XC40 Recharge and Polestar 2. continued investments in product development and the launch The outlook for our new services is bright, but while making of new digital services. A mobile payment service for filling progress in terms of the bank’s mobility we – and the rest of the up at Tanka service stations is one of the digital services that world – also face a challenge in managing the difficult COVID-19 were launched during the year. Finally, I should add that our pandemic. We are confident, however, that our development Trucks business also had a successful year. Earnings came in structure and our drive will enable us to remain one step ahead at SEK 19.5 million, which is an increase of as much as 48%. even in a recessionary environment. I would really like to take Volvo Trucks had a very successful 2019, maintaining its sales this opportunity to thank all our wonderful employees at the volume in Sweden with 2,636 heavy trucks sold. bank for their tremendous efforts in 2019. Looking at our earnings for the year, it is also clear that the bank has benefited from the rise in market interest rates, which Conny Bergström in December re-entered positive territory after the Riksbank’s CEO rate hike, after nearly five years of remaining below zero. Volvofinans Bank AB

8 VOLVOFINANS BANK 2019 INTRODUCTION

JAN–DEC 2019 KEY FINANCIALS

Operating profit: SEK 516m (502)

Return on equity: 10.7% (10.1)

Lending at 31 December: SEK 37.9bn (37.3)

Net credit losses: SEK 16.0m (13.2)

Common Equity Tier 1 capital ratio: 19.4% (18.1)

VOLVOFINANS BANK 2019 9 INTRODUCTION

SWEDEN’S VOLVO DEALERSHIPS IN 2019

A COMPREHENSIVE SALES NETWORK VOLVOFINANS BANK Sweden’s Volvo dealers form a nationwide retail network that includes AND THE VOLVO DEALERS 54 privately owned dealerships and two listed dealerships with around The bank’s mission is to raise money for financing the dealers’ loan and 239 sales outlets and over 266 workshops. In addition, the general lease contracts; in other words, to support their business operations. agent, Volvo Car Sverige AB, also has stakes in three sales companies. Working in close collaboration with Volvofinans Bank, Sweden’s Volvo Stock exchange-listed Bilia AB owns the largest passenger car company, dealers are market leaders in terms of vehicle-related services such as while AB Volvo owns the largest truck company. These listed companies financing and payment solutions. account for nearly 40% of Volvo and Renault sales in Sweden’s car and truck markets, respectively. VOLVO DEALERS’ CREDIT RATING The dealer network comprises 31 different owners and groups of Each dealer’s credit rating is one of the indicators that the bank owners. The operations of the network are divided into passenger car follows in order to assess the payment capability from a longer and truck operations. The majority of the companies, 42, only sell cars, perspective. The Volvo dealers’ creditworthiness is assessed for each while 16 only sell trucks (“heavy” trucks >16 tonnes). One sells both individual legal entity. A significant majority of Volvo’s 59 dealers have cars and trucks. the highest possible credit rating. SWEDEN’S VOLVO DEALERSHIPS IN 2019 IN FIGURES YEAR AAA AA A B NEW NUMBER Net sales in the Volvo dealer network in 2019 amounted to approximately 2019 71% 24% 5% – – 59 SEK 52 billion, with earnings totalling around SEK 1,800 million. 2018 73% 22% 5% – – 59 2017 84% 12% 4% – – 58 A BROADER BUSINESS 2016 76% 20% 4% – – 59 The Volvo dealers’ product range is the broadest among Swedish auto 2015 63% 30% 7% – – 60 dealers, covering everything from the sale of passenger cars and delivery vehicles (Volvo, Renault and Ford) to heavy trucks and buses (Volvo). The bank’s business has continued to broaden as Volvo dealers have started to sell additional brands. In addition to Volvo, Renault, Ford, Dacia, Jaguar and Land Rover, brands such as Hyundai, Mazda, Toyota, Nissan and BMW have been added in recent years. Through the Volvo dealer network the Bank thus gains access to a larger market than previously.

10 VOLVOFINANS BANK 2019 INTRODUCTION

SWEDEN’S VOLVO DEALERSHIPS FIVE-YEAR SUMMARY (AMOUNTS IN SEK MILLION)

Forecast NET SALES AND EARNINGS 2019 2018 2017 2016 2015 Net sales Cars 45,478 46,752 46,243 43,901 41,877 Net sales Trucks 6,291 6,901 6,445 6,346 5,382 Profit after net financial items Cars 1,564 1,306 1,448 1,504 1,342 Profit after net financial items Trucks 243 310 292 301 247

Total net sales 51,770 53,653 52,688 50,247 47,259

Total profit after net financial items 1,807 1,616 1,740 1,805 1,589

KEY PERFORMANCE INDICATORS Equity/assets ratio (%) Cars 35 34 34 37 33 Equity/assets ratio (%) Trucks 39 42 38 44 34 Return on equity (%) Cars 23 15 23 31 23 Return on equity (%) Trucks 29 36 26 35 18

Note: The figures for 2019 are based on forecasts, since final annual reports were not available at the time of publication.

VOLVO DEALERS, NET SALES VOLVO DEALERSHIPS, EARNINGS (SEK MILLION) (SEK MILLION)

56,000 1,850

1,800 54,000 1,750 52,000 1,700

50,000 1,650

1,600 48,000 1,550 46,000 1,500

44,000 1,450 P 2019 2018 2017 2016 2015 P 2019 2018 2017 2016 2015

VOLVOFINANS BANK 2019 11 INTRODUCTION

DIRECTORS’ REPORT

The Board of Directors and Chief Executive Officer of Volvofinans 2019 2018 Change, Bank AB (publ) hereby present their report on operations for 2019. SEK billion % SEK billion % SEK billion Hereinafter referred to as the bank. Sales finance – Cars 32.5 86 32.0 86 0.5 GROUP STRUCTURE – Trucks and Buses 3.2 8 3.3 9 - 0.1 The bank has its registered office in Gothenburg. Inventory credits 0.4 1 0.2 1 0.2 Volvofinans Leasing AB, Autofinans Nordic AB, CarPay Sverige AB Credit card credits 1.8 5 1.8 4 0 and Volvofinans IT AB are wholly owned, dormant subsidiaries. Total 37. 9 100 37. 3 100 0.6 As permitted under Ch. 7 Section 6a of the Swedish Annual Accounts for Credit Institutions and Investment Firms Act (1995:1559), the bank Volvo Car Leasing decreased by SEK 0.2 billion, or 2%, while Volvo Car does not prepare consolidated financial statements, as the activities of Loans and Volvo Truck Loans increased marginally. Collateral assignment, the subsidiaries are of minor importance. where Volvo dealers have a credit with underlying loans or leases as Together with Volvo PV Fordonspark AB, Volvohandlarföreningen collateral, increased by SEK 99.4 million or 33%. ek. för. and Volvohandelns PV Försäljnings AB, which is also a general The volume of credit card credits was somewhat higher compared to partner, the bank owns three limited partnerships, one of which sells on the previous year. Net sales through Volvo Card amounted to SEK 15.1 commission through the Swedish Volvo dealer network while the other billion (14.3), and during the year there were 30.2 (29.2) million card two provide rental services to companies in Volvo Car Corporation. purchases. The number of corporate customers for whom CarPay Fleet handles SIGNIFICANT EVENTS DURING THE FINANCIAL YEAR car administration increased during the year, with 47,588 cars (45,860) No significant events occurred during the year. being administered at year-end. Net sales through the Volvo Truck Card were down year on year, with INFORMATION ON RISKS AND UNCERTAINTIES goods and services purchased in 2019 using the 16,443 cards (17,016) Information on risks and uncertainties can be found in Note 2. totalling SEK 324 million (364).

VOLUMES/LENDING PERFORMANCE At year-end, there were 253,365 contracts (255,715) in the bank’s Profit before credit losses was SEK 532.1 million (514.7), corresponding to loan and lease portfolios, corresponding to a decrease of 0.9% on the an increase of 3.4% on the previous year. Depreciation of property, plant previous year. The size of the portfolios is influenced by new vehicle and equipment refers mainly to lease assets. The depreciation charge sales for Volvo Cars and Volvo Trucks in Sweden and sales of used was affected by lease volumes and the rate of depreciation, based on vehicles through Sweden’s Volvo dealerships. contractual residual values at the end of the lease term. The table below shows the bank’s market shares in the form of the Net credit losses totalled SEK 16.0 billion (13.2), see Note 15. inflow of contracts relative to new car sales (Volvo/Renault) and sales Earnings after credit losses were SEK 516.1 million (501.8), an of used vehicles through the Volvo dealerships. increase of 3%. The difference compared with the previous year was mainly due to lower borrowing costs as well as increased from income Penetration, % 2019 2018 2017 2016 2015 from surpluses on termination of operating leases. New cars 51 52 53 54 49 The return on equity was 10.74% (10.15). Used cars 38 36 36 36 35 New trucks 54 54 57 54 50 CREDIT RISKS AND CREDIT LOSSES Out of the bank’s total lending for vehicle finance, 76% (77) refers to For Volvo Trucks the figures do not include sales made through Volvo loans and leases which dealers have transferred or pledged, posting Truck Center, which is owned by AB Volvo. vehicles as collateral through right of repossession or ownership rights. The bank’s lending, including leases, stood at SEK 37.9 billion The dealer bears the ultimate credit risk for these credit contracts if (37.3) at year-end, an increase of 1.6% on the previous year. Lending required by the bank. consists mainly of leases, loans, contract credits, dealer inventory The bank can incur a loss on these contracts if all of the following credits and credit card credits. events occur: The following table shows the percentage distribution of lending 1. The customer suspends payments. by segment compared with the previous year. 2. The dealer lacks the ability to pay. 3. The market value of the repossessed vehicle is less than the remaining debt under the contract.

12 VOLVOFINANS BANK 2019 INTRODUCTION

At 31 December 2019, the breakdown of loan and lease contracts was Deposits from the bank's savings account increased by SEK 3.4 billion as follows. The unencumbered portion of outstanding contracts at year- during 2019 and the total balance of savings accounts thus amounted end was SEK 2.8 billion (2.5). to SEK 20.1 billion (16.7) as of December 31. Total deposits, including balances on Volvo Card accounts and deposits from Volvo dealers, Loans Leases Total amounted to SEK 21.2 billion (18.2) and accounted for 58% (50) of the Number of contracts 127,387 125,978 253,365 bank’s financing. Average contract, SEK ‘000 119 186 152 The bank’s bond programme provides the option to issue in the cur- Collateral value, SEKm 15,214 23,415 38,628 rencies SEK, NOK and EUR. So-called green bonds can also be issued. However, due to the strong inflow into the bank’s savings account in the Credit used, SEK million 14,834 20,956 35,790 first half of the year, no bonds were issued in 2019. Instead, the bank re- Loan-to-value ratio, % 98 89 93 purchased bonds worth a nominal SEK 657 million. Commercial papers to a value of SEK 300 million were issued during the year. Outstanding Inventory financing requiring 100% collateral accounts for 1% (1) of total financing through the bank’s market loan programme amounted to a lending and is secured through floating charges, the unencumbered nominal SEK 13.1 billion (15.6) as at 31 December 2019. portion of contract portfolios and guarantees received. In addition to market borrowing and deposits, the bank also finances The remaining financing, for which no collateral is provided by its operations with bank credits, which amount to SEK 1.6 billion dealers, accounts for 24% (23), of which 19% (18) refers to sales (2.1). The share of financing with remaining terms of more than one finance and 5% (5) to credit card credits. year via the market loan programme and banking sectors amounted Receivables which are more than 90 days overdue amounted to to 69% (81). In addition to drawings on the above bank credits, there SEK 106.3 million (217.3) and consisted of loans and leases of SEK are contracted cheque and credit facilities with banks of SEK 4.3 93.4 million (205.6), of which SEK 90.2 million (198.3) referred to billion (4.3). The maturity structure for the bank’s total financing at contracts under which the bank has a right of recourse against Volvo 31 December 2019 is shown in the table below. dealers, and credit card receivables of SEK 13.0 million (11.7), accounting for 0.7% (0.7) of total credit card lending. The value of credit card receivables, SEK 1.8 billion (1.8), is stated SEKm % after impairment. The provision represents 1.3% (1.3) of the value of the Within 1 year 4,604 30 receivables. Risk exposure to private individuals is limited through a low 1-3 years 7,225 48 average debt. At year-end, the average debt per active credit card was 4–5 years 2,857 19 SEK 3,956 (3,828). Over 5 years 400 3 15,086 100 CAPITAL RAISING No term: The bank’s principal objectives for capital raising, as defined in its – Deposits from the public 21,217 financial policy, are to: – Equity (incl. tax portion of untaxed reserves) 5,173 • Secure the necessary loan funding. Total 41,476 • Ensure that the bank is able to borrow on the best possible terms. • Ensure that fixed-rate terms on the bank’s borrowings match those RATING for lending as closely as possible. The bank has the following international credit ratings from • Ensure that liquidity risk is minimised as far as possible. Moody’s Investors Service • Short-term financing: P-2 The bank’s financing facilities and borrowing arrangements and drawn • Long-term financing: A3 portions at 31 December 2019 are shown in the table below. • Outlook: Stable

Nominal amounts in SEKm Limit Drawn A detailed and up-to-date analysis from Moody's is available on Nordic commercial paper programme 8,000 300 our website, under the heading “About Volvofinans Bank/Investor MTN programme 20,000 12,791 Relations”. Short-term financing facilities with banks 2,450 – Long-term financing facilities with banks 3,593 1,593 Deposits from the public – 21,217 Risk capital – 400 Total 34,043 36,301

VOLVOFINANS BANK 2019 13 INTRODUCTION

EVENTS AFTER THE BALANCE SHEET DATE SHAREHOLDERS While the recent outbreak of the novel coronavirus (COVID-19) makes Established in 1959, the bank is 50% owned by the Swedish Volvo it difficult to assess the outlook for the Swedish economy, the outbreak dealerships through their holding company, AB Volverkinvest and is 50% had not had a material impact on the bank’s financial position, earnings owned by Volvo Personvagnar AB. The share capital amounts to SEK or cash flow at the time of publication of this annual report. The Board 400 million, divided into 1,000,000 shares with a quotient value of SEK of Directors proposes that the dividend proposed to the AGM 2020, 400. The Board of Directors currently has no authorisation from the AGM as previously communicated in the year-end report, not be paid. This has to approve the issue of new shares or buy back shares of the company. had an impact on the bank’s capital base, which has increased. The key ratios capital ratio, Common Equity Tier 1 capital ratio and leverage ratio NOMINATION COMMITTEE have thereby also increased. The bank shall have a Nomination Committee comprising at least three members. Members shall consist of representatives of each of OUTLOOK the largest shareholders who wish to appoint one. The members of the Despite uncertainty in the market at large, the bank is full of expec- Nomination Committee shall be independent in relation to the company tations for the future, what its digital capabilities can lead to and what and its management. At least one of the members of the Nomination the bank can contribute in the area of mobility. The bank is working Committee shall be independent in relation to the largest shareholder or consistently to digitalise the services for all of its customers, an group of shareholders in the company who are involved in the company’s oppor­tunity provided by the continued stable ownership of the bank management. The Nomination Committee's term of office extends until and consistently strong capital base. a new Nomination Committee is appointed by the general meeting of shareholders. If a member wishes to terminate his/her assignment dur- CORPORATE GOVERNANCE REPORT ing the term of office, the shareholder represented by that person may The bank’s primary mission is to actively support sales of the products appoint a new member to the Nomination Committee. The Chairman of that are marketed through Volvo dealerships in the Swedish market by the Nomination Committee is appointed by members of the Nomination providing product and sales finance while ensuring good profitability. Committee. Board members may serve on the Nomination Committee. Good corporate governance is about, on behalf of shareholders, ensuring The composition of Nomination Committee shall be based on share- that the company is managed sustainably, responsibly and as efficiently holder statistics as of the last business day in November, along with other as possible. As of 2017, the bank has chosen to voluntarily adhere to the shareholder information that the company has at that date. Swedish Code of Corporate Governance (the Code) and, based on the If, during the Nomination Committee’s term of office, one or more of prevailing circumstances, decided to choose a different solution than is the shareholders who appointed members of the Nomination Committee advocated in the Code for the following situations: no longer are the largest shareholders in terms of voting rights, members appointed by those shareholders shall make their seats available. The Area Deviation Reasons shareholder(s) who have become the largest shareholders shall then Nomination The Chairman of the Board There are no minority appoint their representatives. Unless there are special reasons, no changes Committee is the Chairman of the Nomina- shareholders, but there are two shall be made to the composition of the Nomination Committee if only tion Committee and the bank owners with 50% ownership does not provide information each, both of whom want this marginal changes in votes have taken place or if the change occurs later on the website about how solution. than three months prior to the AGM. Shareholders who are among the shareholders can submit largest shareholders as a result of a more substantial change in the number proposals to the Nomination Committee. of votes later than three months before the AGM shall, however, be entitled Deputy The Articles of Association In view of the bank’s focus, to appoint a representative who is co-opted to the Nomination Committee. members of allow up to four deputies on complexity and ownership, Shareholders who have appointed a representative to the Nomination the Board the Board. it has been concluded that it would be beneficial to increase Committee shall be entitled to dismiss such a member and appoint a new the Board of Directors with representative to the Nomination Committee. Changes in the composition two deputies to represent each of the Nomination Committee shall be published as soon as they are made. owner. General The bank has not set a deadline There are no minority owners. meeting on when a request to address However, there are two owners The Nomination Committee shall prepare proposals on the following of share- an issue needs to be submitted. with a 50 per cent holding each, items that are presented to the AGM for a decision: holders Directors or employees of the both of whom have stated that company can act as secretary they do not wish to have such a. proposal of a Chairman for the AGM; or co-sign the minutes at share- a deadline and that the keeper b. proposal of Directors and Deputy Directors to serve on the Board; holders’ meetings. and examiner of the minutes c. proposal of Chairman and Deputy Chairman of the Board; should be elected via a majority vote at the general meeting, d. proposal on the fees and other remuneration for Board work done by without restrictions. each Director along with remuneration for committee work. e. where applicable, proposals for remuneration to the auditor and election of the auditor; f. forward information to the company so that it can fulfil its obligation to provide information, g. to the extent deemed necessary, proposals for amendments to this instruction for the Nomination Committee. 14 VOLVOFINANS BANK 2019 INTRODUCTION

The Nomination Committee is responsible for testing the appropriate- company’s profit or loss. The AGM also decides on the composition of ness of the proposed Board members so that they meet all regula- the Board of Directors, remuneration to the Board and auditors and the tions, both internal and external. The Nomination Committee shall, election of the external auditor. when assessing the Board’s evaluation and in its proposal of Board Notice of the Annual General Meeting and notice of an Extraordinary members, pay particular attention to the requirement for versatility General Meeting at which questions relating to an amendment of the and breadth of the Board and strive for gender balance. At the AGM, Articles of Association will be discussed must be issued no earlier than when the Board and auditor are elected, the Nomination Committee six weeks and no later than four weeks before the AGM. Notice of other shall present and justify its proposals with consideration given to the EGMs must be given no earlier than six weeks and no later than two composition of the Board. weeks before the meeting. The nomination must meet all of the obligations required of a The 2019 AGM was held in the bank’s office in Gothenburg on Nomination Committee. If necessary, the bank will cover reasonable Wednesday 12 June. The 2020 AGM will be held on Thursday 11 June costs of external consultants to assist the Nomination Committee in 2020 in Gothenburg. performing its duties. Prior to the Annual General Meeting 2020, the Nomination Com- AUDITOR mittee consisted of Stefan Nordström, representing AB Volverkinvest, The AGM appoints the bank's auditor as an independent auditor of Maria Hemberg, representing Volvo Personvagnar AB, and the inde- the bank's financial statements and the administration of the Board of pendent committee member Urmas Kruusval. Directors and the CEO. KPMG AB was re-elected as the company’s auditor at the 2019 AGM with authorised public accountant Mikael ANNUAL GENERAL MEETING Ekberg as the head auditor. The auditor has participated in a Board The general meeting of shareholders is the bank's highest decision-­ meeting without the presence of the CEO or other senior executives. making body. The annual general meeting shall be held within six Reporting to the owners takes place at a Board meeting in March, months of the end of the financial year and shall decide on adoption of where the auditor presents his audit report. the income statement and balance sheet, along with appropriation of the

VOLVOFINANS BANK 2019 15 INTRODUCTION

BOARD OF DIRECTORS Board work The Board has the overall responsibility to manage the bank's affairs The Chairman oversees work done by the Board and it is governed by in the interest of both the bank and its shareholders. The Board’s the rules of procedure established in accordance with the Swedish responsibilities also include: Companies Act. The rules of procedure and the annexes thereto • Discussing and making decisions on issues of significant complement and support the application of the Companies Act and importance and of an overall nature. those other laws, regulations and recommendations which the bank • Establishing and monitoring strategies and overall goal having is required to apply. The rules of procedure are reviewed annually and considered the bank’s long-term financial interests, the risks to updated when required. The updated rules of procedure are submitted which the bank is exposed or could be exposed to and the capital for adoption at the first meeting of the Board following the AGM or at required to cover the bank’s risks. another Board meeting if required. • Continuously evaluate the bank's operational management and, The Board has appointed four committees to deal with issues if necessary, set up or dismiss the CEO and approve important in their respective fields. The work carried out in the committees assignments that the CEO has outside the bank. is reported regularly to the Board. The purpose of such work is to • Keep informed of the bank’s development in order to assess the its streamline and engage in more in-depth studies of specific areas. It financial situation and financial position. is not intended as a substitute for the Board’s overall responsibilities. • Promote sustainability aspects relevant to the business. For other work done by the Board, there has been no specific allocation • Ensure that ethical guidelines are established for the conduct of of responsibilities within the Board, other than the specific tasks that the bank and that the external information is characterised by have been allocated to the Chairman. Deputy Board members are transparency, objectivity and high relevance for the target audiences expected to be present and participate in Board work. of such information. Board work at Volvofinans Bank is carried out in accordance with a • Annually review and approve policies and guidelines relating to the structure, where four ordinary meetings are held each year and which bank's liquidity risk management. are preceded by meetings of the committees. Otherwise, the Board meets as necessary when summoned by the Chairman. A strategy According to the Articles of Association, the Board of Directors shall meeting is held each year, at which time there is more in-depth consist of a minimum of five and a maximum of seven elected members discussion on initiatives to further develop the bank. The Board held five with no more than four deputies. Deputies may state an opinion on all meetings in 2019. The work included a strategy conference, the setting matters and have the right to vote when the ordinary Board member of the budget for 2020, sustainability strategies, ongoing monitoring of is not present. The Board members shall have sufficient insight and performance and the financial position and management of strategy and experience to participate in the management of the bank and, on the development issues. whole, be suitable for the task. The current Board consists of seven ordinary members and four deputies. Evaluation of the Board If the Chairman terminates his or her assignment during the term With the aim of developing the Board's work methods and efficiency, of office, he or she shall be replaced by the Vice-Chairman. If that an evaluation of the Board's work is carried out annually. The members option is not available, the Board shall itself elect a Chairman for the of the Board may respond to a questionnaire regarding, among other period until the end of the next general meeting. things, the composition of the Board, the contents and scope of the Board, presentations at meetings along with the content and quality Diversity policy of the Board meetings. Particular attention is given to the work done The bank aims to ensure that the Board of Directors has a composition by the CEO and Chairman of the Board. The report is prepared for and that is appropriate with regard to the company’s operations, stage of presented to the Board, and dealt with by the Nomination Committee. development and other circumstances, and that is marked by diversity The conclusions of the 2019 evaluation are that the composition of the and breadth in terms of the AGM-elected Directors’ skills, experience Board regarding expertise and experience is well balanced as regards and background. the diversity policy as well as the current and future needs that exist To meet these objectives, the bank strives to ensure a broad pool of in the business. In the evaluation report for the previous year it was characteristics and skills, and emphasises that diversity in terms of age, suggested that the regular reporting between Board meetings be gender, geographic origin, education and professional background are expanded in view of the accelerating pace of change in the market important factors to consider when electing new board members. in which the bank operates. The 2019 evaluation report states that the Board members’ request has been met and that the frequency of regular reporting between meetings is satisfactory.

16 VOLVOFINANS BANK 2019 INTRODUCTION

Board committees The Board of Directors shall appoint at least two members to serve on the Board’s Credit, Audit and Risk, Remuneration and IT Committees. Prior to an ordinary Board meeting and on a regular basis, as needed, the members of each committee must meet to discuss, decide and prepare current matters prior to a decision by the Board. The tasks of the various committees are: • The Credit Committee is a preparatory body which drafts matters for consideration and submits recommendations on credit deci- sions to the Board of Directors. • The Audit and Risk Committee is a processing body that monitors financial reporting, internal control, auditing and the risk manage­ ment system. The Audit and Risk Committee shall keep itself informed of the audit, review and monitor the auditor’s independ- ence and impartiality and shall assist the Nomination Committee in preparing proposals for the election of the auditors. In addition, the committee shall recommend to the Board which other services it should request of its auditors. • The Remuneration Committee is responsible for preparing significant decisions on remuneration and deciding on measures to follow up the application of the bank’s remuneration policy. • The IT Committee is a processing body that will monitor IT security having considered security requirements in the IT area and is respon- sible for making recommendations to the Board on security issues.

Remuneration of the Board of Directors The remuneration of the Board and committees is proposed by the Nomination Committee and is adopted by the general meeting of shareholders. Information on fees for 2019 is provided in Note 12.

VOLVOFINANS BANK 2019 17 INTRODUCTION

BOARD OF DIRECTORS

Urmas Kruusval Synnöve Trygg Per Avander Kristian Elvefors Ann Hellenius Chairman Vice Chairman Director Director Director

Born 1951 1959 1961 1974 1974

Elected 2007 2014 2012 2016 2017 Committee Credit, Audit and Risk, Credit, Audit and Risk and Credit, Audit and Risk and Remuneration Committee IT Committee Remuneration and IT IT Committees Remuneration Committees Committees Education Studies at Gothenburg MBA, Stockholm University High school economic Reserve Officer and M.Sc. in M.Sc. in Business and School of Business, studies Business and Economics Economics, Linköping Economics and Law University, University of Bath

Other important Board member of Board member of CEO, AB Bilia Chairman CEO of Volvo Car UK. Board member of HiQ, assignments Borås Bil LV AB, SBAB Bank AB, of Bilia Personbilar AB, MSAB and Synsam. Borås Bil PV AB and Synnöve Trygg Bilia Personvogner AS, Borås Bil Förvaltning AB. Consulting AB, Bilia Personbil AS, Valitor HF and Precise Autohaus Bilia Germany, Biometrics AB. Bilia Emond Holding in Luxembourg and Bel- gium. Also Chairman of the Board at AB Volverkinvest, Volvohandlarföreningen Ek För. and Verstraeten, Belgium. Board member of Netbil Begagnat.

Other prior important CEO AB Volvofinans, Board member of Banker at Svenska Handels­ Sales Director at Volvo Car CIO Bankgirot, CIO City positions held 1990–1999. Landshypotek Bank AB, banken, Head of Sales Sverige AB, CEO at Sunfleet of Stockholm, CEO and Intrum Justitia AB, at Scaniabilar and Head Carsharing AB, Head of founder of Solvitur AB, Trygg Hansa AB, of Sales and Marketing Business Development Manager at Ernst & Young MasterCard Europé, Bilforum, Gothenburg and at First Rent a Car AB, Management Consulting, Diners Club International, Värmlands Bil. CEO at Din Head of Sales at Volvo Car Strategy Consultant at Nordax Bank AB and Bil, Gothenburg and Din Sverige AB, Management Cambridge Strategic Wrapp AB. CEO at SEB Bil, Stockholm. Regional Consultant at Cap Gemini Management Group. Bank AB, Eurocard AB and Director Bilia Personbilar Ernst & Young. Diners Club Nordic AB. Stockholm, Deputy CEO Bilia Personbilar AB, Sweden, CEO Bilia Person­ bilar AB Sweden.

Relationship to the Independent Independent Independent Independent Independent company and its management Relationship to the Independent Independent Not independent Not independent Independent bank’s owners Shareholding in the – – – – – Bank Participation at Board 5/5 5/5 5/5 5/5 5/5 meetings Participation at 4/4 1/4 2/4 – – committee meetings Participation at Audit 4/4 4/4 2/4 – – and Risk Committee meetings

Participation at 4/4 – 3/4 3/4 – Remuneration Committee meetings Participation at IT 4/4 4/4 – – 4/4 Committee meetings

18 VOLVOFINANS BANK 2019 INTRODUCTION

Elisabeth Mosséen Björn Rentzhog Pascal Bellemans Jonas Estéen Janola Gustafson Anders Gustafsson Director Director Deputy Deputy Deputy Deputy

1965 1969 1959 1971 1967 1968

2019 2016 2016 2019 2016 2011

Credit, Audit and Risk and IT – – – IT committee – Committees

M.Sc. in Economics and M.Sc. in Business and Master’s Degree in M.Sc. in Business and Econom- Degree in Logistics, Executive Business Business, Gothenburg Economics, Mid Sweden Cconomics (M.Sc.) ics, Mid Sweden University, Ös- Jönköping University Management US, EU & CN School of Business, Eco- University, Östersund tersund. PhD student, Research nomics and Law Training Programme, Jönköping International Business School Group Treasurer Volvo Cars. CEO and President, AB Pers- Deputy CEO and Head of CEO and owner of Bilkompa- CEO of Svenska Volvohand- Head of Volvo Car, Chairman of Volvo Car son Invest Chairman of the Volvo Car Financial Services niet Mora Leksand Malung AB. larföreningen, Volvohandlar- Americas Region Försäkrings AB and Volvo Board at Bilbolaget Nord AB, (VCFS), Volvo Car Corpo- Chairman of Vasaloppet, the nas Service AB, Volvohand- Car Financial Services US Eriksson Bil i Norr AB, Valbo ration. Board member of Mora-Älvdalen branch of Sven- larföreningen ek. för., AB LLC. Board member of Trä AB, Wist Last & Buss AB, VCFS US llc., VCFS Germany ska Handelsbanken and Nils Volverkinvest and Volvohand- Volvo Cars Pension Fund, Wist Last & Buss Syd AB, GmbH and VCIS Germany Olsson Dalahästar AB. Board larnas Fordonsförening ek. VCFS Germany GmbH, Wist Last & Buss AS, Wist GmbH. member of Mora Hotell AB för. Board member of Wayke VCIS Germany GmbH and Last & Buss i Sigtuna AB, and Wikmans Bil i Gävle AB. Holding, Tanka i Sverige AB the Swedish Association of Östersunds Lastbilsservice and Deputy Director of Volvo- Corporate Treasurers. AB, NHP Sverige AB and at handelns PV Försäljnings several property compa- Aktiebolag. nies. Board member of AB Persson Invest, Persson Invest Skog AB, Gällö Timber AB, Sjöbodarna 1 i Östersund AB, Sjöbodarna 3 i Östersund AB, JP Vind AB. Treasurer Saab Automobile, CEO and Controller at Wist CEO Volvo Car France, Deputy Chairman of Siljans Chark Sales Director at Corporate CEO Volvo Personbilar CFO Familjebostäder, Funding Last & Buss AB, CFO at CEO at Global Sales Opera- AB, Board member of AB Sales Renault SAS, CEO Sweden, CEO Volvo Manager AB Volvo Treasury. Samhall Midland AB and tions in Gothenburg, CEO at Volverkinvest, Igrene AB (publ) Renault Sweden, Head of Personbilar, EMEA region, Auditor at Deloitte AB. Volvo Auto Italia/Southern Re- and other small and medium- Sales & Marketing Borgstena CEO Hertz Sweden and gion, CEO Premier Automotive sized companies in Dalarna. Textile. COO Hertz Nordic. Chairman Group Asia in Kuala Lumpur, Hertz Rent a Car AB and CEO Volvo Car East-Asia in Hertz First Rent a Car. Kuala Lumpur, CFO Volvo AB Vice-Chairman Hertz Rent a in East Asia and Kuala Lumpur, Car Norway. Board member CEO Volvo Car Thailand in Volvobil, First Rent a Car AB Bangkok, CFO Volvo Cars and Hertz First Rent a Car Europe Marketing in Brussels, AB Finland. CFO Volvo Cars Belgium in Brussels. Independent Independent Independent Independent Independent Independent

Not independent Not independent Not independent Not independent Not independent Not independent

– – – – – –

3/5 5/5 3/5 3/5 5/5 3/5

2/4 – – – – –

2/4 – – – – –

– – – – – –

2/4 – – – 1/4 –

VOLVOFINANS BANK 2019 19 INTRODUCTION

CEO AND MANAGEMENT The CEO is responsible for the bank’s ongoing management and shall perform this task in accordance with the applicable laws and regulations, the Articles of Association, the Board’s rules of procedure, the Board’s instructions to the CEO and other impor- tant instructions issued by the Board. The Board shall, at least once a year, carry out a special evaluation of the work done by the CEO. No senior executives may participate in this evaluation. The CEO is responsible for issuing notice of Board meetings. An agenda describing the nature and scope of each item is Conny Bergström enclosed with the notice of the meeting. Board meeting materials CEO of Volvofinans Bank AB since 2013 are distributed about one week before the day of the meeting and Born 1959 contain written documentation and comments on the matters to Education M.Sc. in Business and Economics, be addressed. In this way, the Board members are forewarned Gothenburg School of Business, of the items to be covered and their scope. It also gives them Economics and Law the opportunity to prepare and set aside time for reading the Other important Board member of Tanka i Sverige AB background information. At each meeting minutes are taken, assignments which contain a brief description of discussions, measures and Other prior important Regional Director at Bilia positions held Personbilar AB, Bilia Region West and resolutions. In addition, the CEO shall provide the Board with Bilia Region East. Previously CEO of current and relevant information about the bank's operations and Volvofinans Konto AB. development so that the Board can make informed decisions. Shareholding – The bank’s management team consists of eleven people, which, besides the CEO, includes the COO, CFO, CIO, Risk Manager, Credit Manager, General Counsel, HR Manager and the Marketing and Sales Managers of the business areas. The group meets regularly to discuss strategy issues having to do with marketing, accounting/finance, business development and resource allocation. The management team is responsible for overall planning of the bank’s operations. Information on the bank’s remuneration policy is provided in the section Remuneration.

20 VOLVOFINANS BANK 2019 INTRODUCTION

INTERNAL CONTROL OVER FINANCIAL REPORTING Control environment In managing its customers’, suppliers’ and business partners’ The backbone of internal control over financial reporting consists money, the bank has specific responsibilities. Due to the large of the bank’s directives, guidelines and instructions as well as the number of transactions, even minor errors can have significant structure of responsibilities and authority that has been adapted to economic consequences. The bank therefore places a strong the bank’s organisation with the aim of creating and maintaining a emphasis on good internal control, and on quality and security satisfactory control environment. Principles for internal control are issues in all functions, routinely engaging staff from all depart- contained in the bank’s IQ manual, and directives and guidelines ments in this work. Internal control can be divided into: for financial reporting are contained in the various manuals used in • Administrative controls – to promote efficiency and ensure the bank. that the bank’s resources are managed in accordance with Fundamental to the control environment is the company the intentions of the Board and CEO. culture that has been established and in which managers and • Accounting controls – to assure correct and complete employees work. The bank actively communicates and instructs accounting. its employees in its core values, which are set forth in the bank’s ethical guidelines policy. The bank seeks to ensure that all em- To ensure that the bank has effective risk management and ployees maintain a high standard of morals, ethics and integrity. good internal governance and controls, the bank is working on a model with three lines of defence. The first line of defence Risk assessment comprises activities within each area which, in addition to being Risks related to financial reporting are assessed and monitored responsible for its operations, is responsible for carrying out by the Board. The assessment of the risk that errors will occur risk workshops, reporting and managing risks and violations of in financial reporting is based on a number of criteria. Complex regulations, and writing and implementing policies, instructions accounting policies, for example, can create a risk of incorrect and guidelines adapted to the bank’s operations. The first line financial reporting in respect of those items which are covered of defence is also responsible for developing and following by the policies. The measurement of a certain asset or liability up control measures designed to ensure that operations are on the basis of different assessment criteria can also constitute managed in accordance with current guidelines. a risk. The same applies to complex and/or changed business The second line of defence consists of the risk control and conditions. compliance functions, which are tasked with carrying out inde- pendent risk and compliance reviews and supervising the first Control activities line of defence. The bank’s risk control function is responsible for The Board and management team constitute the bank’s top-level ongoing monitoring of risks and risk management and is tasked control bodies. Several control activities are applied in the bank’s with making proposals for improvements to risk management day-to-day business process to ensure that any errors or deviations procedures, risk policies, instructions and reports. Compliance in financial reporting are prevented, detected and corrected. is a support function which ensures that the bank operates in Control activities cover everything from the review of results at accordance with applicable laws, regulations, internal rules, and management meetings to the reconciliation of specific accounts good practices and standards. The second line of defence also and analyses in ongoing financial reporting processes. The manage- carries out supporting tasks such as training, workshops and ment team is tasked with ensuring that the bank’s control activities information. It also provides advice to other departments. for financial processes are appropriate and in line with the bank’s The third line of defence is Internal audit, which carries out guidelines and instructions. Management should also ensure that an annual independent review and supervision of the work of authority structures are not designed so as to permit the same both the first and second lines of defence. The remit of the individual to perform an activity and then verify the same activity. internal audit function, which operates independently of the Control activities in IT security and maintenance are an essential operations and on behalf of the Board, is to assist the Board part of the bank’s internal control over financial reporting. and management in objectively evaluating the bank’s control systems, compliance with internal and external rules, and the Information and communication efficacy of internal control. Internal audit shall, when errors Guidelines and instructions for financial reporting are updated and shortcomings have been identified, propose improve- and communicated by management on an ongoing basis. ments and evaluate the efficiency and security of the business processes along with helping the organisation meet its goals. Follow-up and monitoring The function reports directly to the Board of Directors. In Responsibility for ongoing follow-up rests with the management 2019, the internal audit was carried out by PwC and covered team and accounts department. In addition, the Internal Audit, AML, outsourced services, liquidity risk management and the Risk and Compliance functions also follow up and monitor deposit system. operations. Results of evaluation activities are reported to management and the Board.

VOLVOFINANS BANK 2019 21 INTRODUCTION

SUSTAINABILITY REPORT

The bank has a unique business model for the industry, whereby vehicle dealers – following creditworthiness assessment – sell vehicles to the customer and then transfer the contract to Volvofinans with collateral in the item. The dealers bear the credit risk, while Volvofinans borrows on the market, thus providing the dealers with access to the financial markets. The bank finances the dealers’ loans and leases.

In addition to car financing, the bank’s business model also Environment includes card operations aimed at both private and corporate The car industry currently has a major impact on our climate, customers. The bank strives to establish sustainability as a natural but it is also an industry that is undergoing change. Volvofinans part of its business activities. The goal is to develop products with Bank wants to be a driving force behind this change by helping a focus on sustainability. Sustainability forms an integral part of its partners, customers and employees to make better, smarter all new products since it is a requirement of the bank’s approval choices for the future with regard to mobility and living a life on process. For further information on Volvofinans’ business model the move. Developing digital solutions such as CarPay is one part and segments, see the Directors’ Report and Note 4. of this. Technological solutions are also a driver of change in the car industry and are an important factor reduced dependence POLICY on fossil fuels. The risk in the area of the environment thus arises The bank’s Sustainability Policy guides the work on sustainability, mainly from the fact that the bank’s business is to finance vehi- and for the bank sustainability means a responsibility towards cles, which largely run on less environmentally friendly fuels, such customers, partners, employees, society and the environment. The as petrol and diesel. In connection therewith the bank also sees a basic strategy is to combine business value with being a healthy risk of reduced lending volumes as a result of further regulations player on a healthy market. The policy is divided into three areas: in the automotive sector, such as Bonus Malus, which came into economy, ecology and social sustainability. It is supplemented with force on 1 July 2018 and which seeks to reduce the environmen- the company's other policies that address anti-money laundering, tal impact. Electric cars are rapidly gaining in popularity – both credit, bribery and anti-corruption, as well as diversity. fully electric vehicles with no combustion engine and hybrids which have a combustion engine but which can only run only GUIDELINES on electricity. These cars are charged in a grid which in Sweden The bank has adopted the UN Sustainable Development Goals transmits electricity from sources generating relatively minor CO2 (UN SDGs) and has strategically opted to focus on Good Health emissions. Emissions in Sweden are thus decreasing for every and Well-being (3), Gender Equality (5), Sustainable Cities and car that is replaced by an electric vehicle. The bank is working Communities (11), Responsible Consumption and Production closely with Volvo Cars, Polestar, Renault and AB Volvo to drive (12) and Climate Action (13). The Bank’s sustainability policy is sales and financing of electric cars and electric and hybrid buses. also based on the UN Global Compact. The bank has conducted Going forward, the bank expects to see an increase in financing of a GAP analysis against ISO 26000 in order to identify strengths both hybrids and pure electric cars, not least due to the changed and weaknesses and has conducted an analysis of stakeholders. bonus-malus thresholds that were introduced on 1 January 2020. These have together provided the basis for establishing priorities In 2020, Volvo Cars will be launching a pure electric version for sustainability efforts. of its XC40 model and, as mentioned, Volvofinans also finances Polestar in the Swedish market. The bank’s CarPay Fleet business area is working to develop new solutions with a sustainability focus and help its customers make smart, long-term choices for their businesses. The bank also has a partnership with E.ON where all Volvo card customers are offered the opportunity to choose Biogas100 when they fill up at any of E.ON’s refuelling stations. When a customer chooses Biogas100, an equal amount of renewable biogas is produced. The Bank’s partners in other transport fuels have a high proportion of HVO biodiesel. In 2019, the bank published an investors’ report for the green bond, which was issued in 2017. According to the report, the

green loan portfolio contributes to an annual CO2 reduction of 2,700 tonnes. This type of bond is something that is increasingly RISKS being demanded in the capital market, especially by investors who In each section below, the most significant risks that the bank has prioritise green investments, which the bank can see through the identified are described, linked to sustainability in the company’s increase in the loan portfolio of green cars. operations. The risks are of both a strategic and operational nature; The bank’s sustainability goals still include lowering the direct as a bank, we provide capital adequacy for all risks, including environmental impact of both electricity and paper consumption. In strategic and operational ones. 2019, paper invoices to customers decreased by three percent-

22 VOLVOFINANS BANK 2019 INTRODUCTION

100%

80%

60%

Is your workplace free 40% from discrimination

(i.e. discrimination against gender, gender identity, ethnicity, religion, sexual 20% orientation, disability and age)?

0% Communicative Engagement Psychosocial Work Can you freely Leadership Index Index Environment Index express your views (CLI) (EI) (PWI) in your team?

2017 2018 2019 BM 0% 20% 40% 60% 80% 100% BM = Benc hmark, which is based on results from just over 500,000 responses from over 2017 2018 2019 BM 200 organisations (Nordic and international)

age points in comparison with 2018, and Volvofinans uses only In line with staff policy, the bank shall facilitate combining work and renew­able electricity bearing the “Good environmental choice” parenthood for all employees. Through education, skills develop- label. Electricity use in 2019 is not representative, as one office ment and other active measures, the bank continues to work to underwent a major renovation. promote a gender balance in various positions and working groups. It is also important to the bank that the same principles for setting Consumption category 2019 2018 Change pay rates apply to both women and men, irrespective of age and Paper invoices to customers (%) 61 64 - 3 ethnic origin. The bank conducts an annual employee survey where em- Personnel and social conditions ployees rate such things as the bank’s work environment, how The bank is one of the main sponsors behind Number 10, a foot- attractive the bank is as an employer and more. ball scholarship established by the Swedish Football Association and Volvo Car Sweden that is handed over by Swedish footballer Respect for human rights and fighting against corruption Zlatan Ibrahimović. In just three years, the prize, which is aimed at The bank has not identified any significant risks in this area. The promoting and developing Swedish football, has received consid- bank only exists and operates in Sweden, where it complies with erable attention by highlighting issues like locker room talk (2017) laws and its own diversity policy. and everyone’s right to play football (Grunden Bois 2018). This year’s winner, Gatans Lag (Street Team), was established in Gothenburg Anti-corruption in 2008 to provide an alcohol- and drug-free environment for its The bank has a well-functioning whistleblower function and members. Today, Gatans Lag has both men’s and women’s teams conducts continuous training in issues relating to security, ethics in Stockholm and Gothenburg and thousands of players have been and money laundering. During 2019, no whistleblower incidents part of and played for the team over the years. Many have never were reported. played football before and have used the sport and the dedication Significant risks related to anti-corruption: of Gatans Lag to break free from destructive patterns and re-enter • Risk that the bank does not comply with the banking rules and society. The bank also has a partnership with Childhood Foundation. regulations governing the bank’s operations It is the staff who drive the bank’s profitability, and a good • Risk that the bank does not fully comply with the money work environment is of great importance as it provides stimulation laundering regulations for good performances and personal development. The bank has • Risk of internal irregularities identified two risks that emerge particularly clearly in this area: • Risk of the bank becoming dependent on key employees In order to minimise the risk of not complying with banking • Risk of wrong recruitment rules and regulations, the bank’s Regulation Compliance Manager performs regular monitoring. The bank also has an obligation In order to preserve the right skills, the bank is keen to ensure that to assess and minimise the risk of its operations being used for it continues to provide a good physical and psychosocial work money laundering or the financing of terrorism. By always verifying environment. A good balance between work and free time is es- the identity, the purpose of the business and the actual principal of sential to strong performance at work. The bank takes a proactive business customers, the risk of the bank being used to the finan­ approach to employee health and implemented a number of fit- cing of terrorism and money laundering is prevented. As the bank ness programmes during the year. The bank also offers subsidised only operates in Sweden and offers products on this market, the sport and fitness fees and massage for all employees. bank considers that the risk of money laundering and the financing Working conditions, including both the physical and psychosocial of terrorism is reduced. work environment, must be suitable for both women and men.

VOLVOFINANS BANK 2019 23 INTRODUCTION

AGE DISTRIBUTION 2019 Number

50

45

40 REMUNERATION Under the regulations of the Swedish Financial Supervisory 35 Authority, the bank is required to publish information on its

30 remuneration policy and its application at least annually and no later than in connection with the publication of the annual report. 25 Men Women PREPARATION AND DECISION-MAKING PROCESS 20 The Board of Directors of the bank has appointed a Remuner- ation Committee from among its members that is tasked with 15 preparing decisions on important remuneration matters and proposing measures for following up the application of the 10 current remuneration policy. The Board has appointed Chairman of the Board Urmas Kruusval, Per Avander and Kristian Elvefors 5 as members of the Remuneration Committee.

0 An independent control function participates in the process 19–30 31–40 41–50 51–60 61– Age of assessing and evaluating the bank’s remuneration system. The control function reports the results of its assessment to the Board.

PERSONNEL Risk analysis At year-end 2019, the bank had 239 (223) employees, of whom Before a resolution can be taken on the adoption of a remuner- 190 (181) were based in Gothenburg and the rest at our office in ation policy or on other material changes to the bank’s remu- Stockholm. The average number of employees was 220 (207), neration system a risk analysis must be made. The risk analysis with women outnumbering men in the workforce. There are 11 should aim to identify and take account of risks associated with senior executives, of whom two are women. the bank’s remuneration policy and remuneration system that A strong corporate culture is a success factor, and during could have an adverse impact on the bank’s future results and the year the bank continued actively working on its corporate financial position. Based on the risk analysis, the bank then culture, in which all employees were involved. Leadership seeks to identify those employees whose duties have a material remains a priority area and many training efforts have been impact on the company’s risk profile. made during the year. An important meeting place is the Management Forum, which brings together all managers with Remuneration model staff responsibility once a month. Remuneration and other terms of employment should be com- The right skills are an important competitive factor when de- petitive to ensure that the bank is able to attract and retain skilled velopments are proceeding fast. Employee training and develop- employees with the ability to help increase the long-term value of ment are strategically important and an important investment for the company. The remuneration paid by the bank should promote the bank. Appraisal and performance discussions are important effective risk management and discourage excessive risk-taking. tools in dialogues about objectives and development efforts. The The bulk should consist of fixed remuneration. In some cases addi- bank also has internal development programmes that are aimed tional variable remuneration may be paid. Variable remuneration is at helping talented employees develop their skills. based on individual targets that have been approved by the Board. A good work environment is of great importance for the bank’s The bank can also decide to reclaim all or part of the variable profitability, as it stimulates commitment and a strong performance remuneration paid if it is subsequently shown that the employee, at work. The bank is therefore keen to ensure that it continues to profit centre or bank failed to meet the performance criteria. The provide a good physical and psychosocial work environment. bank can also opt not to pay variable remuneration if its financial A modern workplace is part of being an attractive employer. position deteriorates materially. During the year, the company’s offices in Gothenburg were com- pleted, which will enable the bank to operate in a modern way. Variable remuneration The bank conducts an annual employee survey to monitor its The purpose of variable remuneration is to stimulate the employ- employees’ views on issues such as commitment, team effective- ees to achieve particularly important targets defined by the bank. ness, leadership and the psychosocial work environment. Partici- Variable remuneration is offered as a supplement to fixed remu- pation is high and the results of the year remain at a high level. neration for a small number of positions in the bank’s marketing Information on salary payments and remuneration is provided function. Variable remuneration is capped at two months’ salary. in Note 12. No variable remuneration is paid to members of the bank’s man- agement team. Nor is it paid to employees who make decisions on credits/limits or in internal control functions that deal with compliance, risk control and internal auditing.

24 VOLVOFINANS BANK 2019 INTRODUCTION

Deferred remuneration APPROPRIATION OF RETAINED EARNINGS For employees working in positions in which they exercise a The bank’s Annual General Meeting has at its disposal available not insignificant influence on the bank’s risk level and who are profits as per the balance sheet of a total of SEK 111 million. eligible for variable remuneration, 50% of the variable remu- neration should be withheld until three years after the perfor- Amounts in SEK ‘000 mance period if the remuneration exceeds SEK 100,000. 2019 Opening balance of retained earnings 98,252 Other remuneration Profit for the year 13,159 The bank may, in addition to cash remuneration, offer its em- At the disposal of the AGM 111,411 ployees benefits in the form of a company car, health and fitness allowance or other benefits. The bank’s pension solutions are The Board of Directors proposes that the above amount be based on the applicable collective agreements. The bank may appropriated as follows: conclude agreements on individual pension terms and termina- Carried forward 111,411 tion conditions. CAPITAL BASE Expensed amounts Under the regulations governing capital adequacy and large The total amounts of remuneration expensed during the financial exposures, each institution is required at all times to maintain a year by employee category are presented in the table below. minimum capital base equal to the sum of the capital require- ments for credit risks, market risks and operational risks, in ad- No. of No. of dition to the calculated capital requirement for further identified Fixed Variable people people risks in the operations in accordance with the bank’s internal remunera- remu- receiving receiving Employee tion, SEK neration, fixed remu- variable re- capital adequacy assessment process. Following the proposed category* million SEKm neration muneration distribution of profits, the bank will have a capital base of SEK Executive 4,390 million (3,979) and a minimum capital requirement of management 17.2 – 11 – SEK 1,649 million (1,585). A specification of the items is pre- Other employees, sented in the section Risk and capital management. incl. other employees who The Board’s assessment is that the bank’s equity, as reported can influence the in the annual accounts, is adequate in relation to the scope and bank’s risk level** 108.8 0.6 209 5 risk of the operations. Total 126.0 0.6 220 5 For more information about the bank’s results and financial position, see the following income statement, balance sheet and * The “Executive management” category consists of the CEO and other members of the management team who report directly to the Board cash flow statement. or CEO. The category “Other employees who can influence the bank’s risk level” comprises other persons that have been defined as employ- ees whose duties have a material impact on the company’s risk profile.

** In accordance with the regulations and general recommendations of the Swedish Financial Supervisory Authority, quantitative information is not provided for employee categories with a small number of individuals. Quantitative information for the “Other employees” category is therefore provided together with the “Other employees” category.

Remuneration of SEK 126.6 million was charged to expense for the financial year. Variable remuneration consists entirely of cash. No remuneration is deferred and no variable remunera- tion has been promised. No amounts related to severance pay were expensed during the year. No further promises of severance pay and or of guar- anteed variable remuneration in connection with recruitment have been made.

VOLVOFINANS BANK 2019 25 INTRODUCTION

FIVE-YEAR SUMMARY

Amounts in SEK million

Condensed income statement 2019 2018 2017* 2016* 2015* Interest income 545 483 438 395 402 Lease income 5,660 5,318 4,636 4,019 3,619 Interest expense - 335 - 257 - 196 - 182 - 252 Dividend received 0 16 – – – Commission income 439 391 403 353 359 Commission expense - 42 - 44 - 34 - 25 - 22 Net income/expense from financial transactions 1 - 1 - 13 - 1 - 6 Other operating income 68 52 9 4 4 Total income 6,336 5,958 5,244 4,563 4,104

General administrative expenses - 480 - 389 - 335 - 312 - 280 Other operating expenses** - 5,324 -5,055 - 4,483 - 3,859 - 3,449 Net credit losses - 16 - 13 - 18 - 13 - 12 Total expenses - 5,820 - 5,457 - 4,836 - 4,184 - 3,741 Profit before tax 516 502 408 379 363 Profit for the year 13 – – – –

Condensed balance sheet Chargeable treasury bills, etc. 1,430 1,246 1,433 1,041 1,081 Loans and advances to credit institutions 1,281 1,622 1,300 786 1,999 Loans and advances to customers 17,278 16,923 16,484 15,205 13,690 Bonds and other debt securities 2,350 2,232 1,883 1,724 836 Shares and interests in associates and other companies 18 31 27 26 24 Intangible assets 15 21 18 11 7 Property, plant and equipment 20,661 20,364 18,634 15,978 13,693 Other assets 1,003 938 870 703 671 Total assets 44,036 43,377 40,649 35,474 32,001

Borrowings 35,902 35,834 33,772 29,158 26,185 Other liabilities 2,562 2,383 2,135 1,907 1,738 Subordinated debts 400 400 – – – Untaxed reserves 4,626 4,128 3,630 3,223 2,844 Equity 546 632 1,112 1,186 1,234 Total liabilities and equity 44,036 43,377 40,649 35,474 32,001

* The comparative figures for 2015–2017 have not been restated retrospectively as a result of the introduction of IFRS 9 in 2018. ** Including depreciation of property, plant and equipment and amortisation of intangible assets.

26 VOLVOFINANS BANK 2019 INTRODUCTION

KEY PERFORMANCE INDICATORS 2019 2018 2017 2016 2015 Return on equity, % 10.74 10.15 8.77 8.68 8.93 Risk capital/total assets, % 12.43 11.67 11.47 12.22 12.60 Deposits/lending, % 55.94 48.87 45.60 49.43 52.33 Earnings/risk-weighted assets, % 2.50 2.53 2.22 2.30 2.42 Return on total assets, % 0.93 0.94 0.84 0.88 0.92

Total capital ratio, % 21.29 20.08 20.63 21.26 21.79 Common Equity Tier 1 capital ratio, % 19.35 18.06 20.63 21.26 21.79

Net interest income/ø lending, % 1.59 1.48 1.50 1.44 1.38 Credit losses/lending, % 0.04 0.03 0.05 0.04 0.04 Operating expenses/lending, % 1.42 1.21 1.32 1.24 1.23 Cost/income ratio, % 0.51 0.47 0.52 0.49 0.48 C/I ratio excluding residual value reservation 0.53 0.53 0.44 0.46 0.46 Liquidity coverage ratio 257 333 280 119 205 NSFR (net stable funding ratio) 143 145 146 144 143 Leverage ratio 9.1 8.3 9.4 9.8 10.1 Average number of employees 220 207 196 189 184

Definitions of alternative performance measures and key performance indicators in accordance with Swedish capital adequacy regulations can be found under: https://www.volvofinans.se/en/about-us/investor-relations/financial-statements/

VOLVOFINANS BANK 2019 27 INTRODUCTION

INCOME STATEMENT

Amounts in SEK ‘000 1 January–31 December

Operating income Note 2019 2018 Interest income 5 544,851 482,494 of which income calculated using the effective interest method (544,843) (482,494) Lease income 6 5,659,891 5,318,171 Interest expense 5 - 335,319 - 256,698 Net interest income 5,869,423 - 5,543,967

Dividends received 7 308 16,352 Commission income 8 439,436 390,839 Commission expense 9 - 42,169 - 43,915 Net income/expense from financial transactions 10 851 - 563 Other operating income 11 68,202 51,724 Total operating income 6,336,051 5,958,404

Operating expenses General administrative expenses 12 - 480,027 - 389,147 Depreciation and impairment of property, plant and equipment and amortisation and impairment of intangible assets 13 - 5,248,131 - 4,941,822 Other operating expenses 14 - 75,821 - 112,727 Total operating expenses - 5,803,979 - 5,443,696

Profit before credit losses 532,072 514,708 Net credit losses 15 - 16,041 - 13,185 Impairment losses/Reversals of financial assets, net 57 276 Operating profit 516,088 501,799

Appropriations 16 - 498,268 - 498,479 Tax on profit for the year 17 - 4,661 - 3,320 Profit for the year* 13,159 –

* Profit for the year is the same as comprehensive income for the year.

28 VOLVOFINANS BANK 2019 INTRODUCTION

BALANCE SHEET

Amounts in SEK ‘000

Assets Note 31 Dec 2019 31 Dec 2018 Chargeable treasury bills, etc. 18 1,429,949 1,245,816 Loans and advances to credit institutions 19 1,281,290 1,622,571 Loans and advances to customers 20 17,278,081 16,922,760 Bonds and other debt securities 21 2,349,552 2,231,967 Shares and interests in associates and other companies 22 11,258 23,777 Shares and interests in Group companies 23 6,742 6,742 Intangible assets 24 15,060 21,545 Property, plant and equipment, fixtures and fittings 25 12,133 6,488 Property, plant and equipment, lease assets 25 20,648,640 20,357,024 Other assets 26, 27 936,042 887,128 Prepaid expenses and accrued income 28 67,246 50,743 Total assets 44,035,993 43,376,561

Liabilities and equity Liabilities to credit institutions 29 1,592,857 2,083,333 Retail deposits and borrowings 30 21,216,735 18,218,366 Securities issued 29 13,091,737 15,532,399 Other liabilities 27, 31 1,255,682 1,079,373 Accrued expenses and deferred income 32 1,306,053 1,302,984 Subordinated debts 33 400,000 400,000 Total liabilities 38,863,064 38,616,455

Untaxed reserves 34 4,626,458 4,128,190

Equity 35 Restricted equity: Share capital, (1 ,000,000 shares with a quotient value of SEK 400) 400,000 400,000 Statutory reserve 20,000 20,000 Development fund 15,060 21,222 Non-restricted equity: Retained earnings 98,252 190,694 Profit for the year 13,159 – Total equity 546,471 631,916 Total liabilities and equity 44,035,993 43,376,561

VOLVOFINANS BANK 2019 29 INTRODUCTION

STATEMENT OF CHANGES IN EQUITY

Amounts in SEK ‘000 Restricted equity Non-restricted equity Retained earnings Statutory Development incl. profit Share capital reserve fund for the year Total equity Opening equity 1 January 2018 400,000 20,000 16,089 676,424 1,112,513 IFRS 9, reclassification of securities – – – 1,500 1,500 IFRS 9, reclassification of credit risk provision – – – - 2,613 - 2,613 Adjusted opening balance, 1 January 2018 400,000 20,000 16,089 675,311 1,111,400 Profit for the year – – – – – Transfer self-generated development costs – – - 5,133 - 5,133 – Total change before transactions with shareholders 400,000 20,000 21,222 670,178 1,111,400

Dividend – – – - 479,484 - 479,484 Closing equity, 31 December 2018 400,000 20,000 21,222 190,694 631,916

Opening equity 1 January 2019 400,000 20,000 21,222 190,694 631,916 Profit for the year – – – 13,159 13,159 Transfer self-generated development costs – – - 6,162 6,162 – Total change before transactions with shareholders 400,000 20,000 15,060 210,015 645,075

Dividend – – – - 98,604 - 98,604 Closing equity, 31 December 2019 400,000 20,000 15,060 111,411 546,471

30 VOLVOFINANS BANK 2019 INTRODUCTION

CASH FLOW STATEMENT

Amounts in SEK ‘000

Operating activities 2019 2018 Operating profit 516,088 501,799

Adjustment for non-cash items Unrealised portion of net income/expense from financial transactions 1,920 - 563 Depreciation, amortisation and impairment 5,248,171 4,947,844 Credit losses 14,600 11,884 Paid/refunded (-/+) taxes - 3,328 - 1,236

Changes in operating assets and liabilities Chargeable treasury bills - 184,133 187,032 Loans and advances to customers - 369,907 - 449,362 Bonds and other debt securities - 117,586 - 349,306 Retail deposits and borrowings 3,001,369 2,204,461 Liabilities to credit institutions - 490,476 - 66,667 Other assets - 66,763 - 70,897 Securities issued - 2,440,662 - 75,484 Other liabilities - 177,456 247,470 Cash flow from operating activities 5,286,751 7,086,977

Investing activities Capitalised development expenditure - 7,403 - 22,044 Investments in shares and interests - 3,426 - 3,361 Sale/redemption of shares and interests 12,946 – Sale of property, plant and equipment 4,682,274 3,899,084 Acquisition of property, plant and equipment - 10,213,819 - 10,559,274 Cash flow from investing activities - 5,529,428 - 6,685,594

Financing activities Subordinated debts – 400,000 Dividend paid - 98,604 - 479,484 Cash flow from financing activities - 98,604 - 79,484

Cash flow for the year Cash and cash equivalents at beginning of year 1,622,571 1,300,672 Cash flow from operating activities 5,286,751 7,086,977 Cash flow from investing activities - 5,529,428 - 6,685,594 Cash flow from financing activities - 98,604 - 79,484 Cash and cash equivalents at end of year, see Note 41 1,281,290 1,622,571

VOLVOFINANS BANK 2019 31 32 VOLVOFINANS BANK 2019 NOTES

VOLVOFINANS BANK 2019 33 NOTES

NOTES TO THE INCOME STATEMENT and instructions for the granting of credit and other operations. AND BALANCE SHEET Overall responsibility the company’s risk-taking lies with the Unless otherwise specified, amounts are stated in SEK ‘000. bank’s Board. In a specific instruction within certain frame- Volvofinans Bank AB, hereinafter “the bank”, operates in the works, the Board has delegated responsibility to various other Swedish market. functions, which in turn regularly report to the Board. The bank’s risk management is aimed at identifying and assessing risks in NOTE 1. INFORMATION ABOUT THE BANK the activities of the bank, and determining an appropriate risk appetite (limits) for these and ensuring that effective internal The Annual Report was released on 31 December 2019 control systems have been put in place. Risks are monitored and and refers to Volvofinans Bank AB (“the bank”), which is a controls are performed on a regular basis to ensure that limits Swedish­-registered credit institution based in Gothenburg. are not exceeded. Risk policies and risk management systems The address of the head office is Bohusgatan 15, Box 198, are reviewed regularly to ensure that they are correct and SE-401 23 Gothenburg. reflect current market conditions as well as the products and The bank is 50% owned by the Swedish Volvo dealerships services offered. Through training and clear processes, the bank through the holding company AB Volverkinvest and 50% owned creates a basis for good risk control, ensuring that each employ- by Volvo Personvagnar AB. The bank conducts sales finance and ee understands his or her role and responsibility. credit card operations. The bank has a central function for independent risk control As permitted under Ch. 7 Section 6a of the Swedish Annual that reports directly to the CEO. The risk control function is Accounts for Credit Institutions and Investment Firms Act tasked with analysing changes in the risks and, where neces- (1995:1559), the bank does not prepare consolidated financial sary, proposing changes to governing documents and process- statements, as the activities of the subsidiaries are of minor es. The function is responsible for the design, implementation, importance. reliability and monitoring of the bank’s risk classification system.

NOTE 2. RISK AND CAPITAL MANAGEMENT RISK STRATEGY BACKGROUND The bank’s risk strategy and risk appetite should: Volvofinans Bank AB (publ), corporate ID number 556069-0967, • serve as policy instruments for achieving the company’s is subject to the EU regulations Directive 2013/36/EU of the strategic objectives European Parliament and of the Council of 26 June 2013 on • take account of VFB’s unique business model in the access to the activity of credit institutions and the prudential Swedish Volvo system supervision of credit institutions and investment firms and Regu- • take account of VFB’s desire to be viewed as lation (EU) No 575/2013 of the European Parliament and of the “The mobility bank” Council of 26 June 2013 on prudential requirements for credit • be adapted to the various business areas in VFB, institutions and investment firms. i.e. Cars, Fleet and Trucks The regulations have been incorporated into Swedish law. In • be systematic, structured and permeate the entire addition, a large number of regulations and general recommen- organisation dations have been issued by the Swedish Financial Supervisory Authority (FSA). The bank has identified the following risk categories as the most This annual report provides the information required under important risks for the bank to manage in order to meet the the aforementioned laws and regulations. bank’s strategic objectives: In spring 2011 the FSA approved the bank’s IRB application • Credit risk for permission to use the internal ratings-based (IRB) approach • Operational risk for calculating capital requirements for credit risk for retail • Concentration risk (credit risk) exposures and non-credit obligation asset exposures. Three • Interest rate risk years later, in spring 2014, the Swedish Financial Supervisory • Counterparty risk Authority approved the bank’s application for permission to • Liquidity risk apply internal models also for the bank’s corporate exposures. • Reputational risk The bank has been granted a permanent exemption to use the • Strategic risk standardised approach for exposures to the Swedish State, the • Residual value risk Swedish National Bank and Swedish local authorities as well as for the exposure classes sovereign and institutional exposures The bank’s overall risk strategy is based on continuous analysis and portfolios which are insignificant in size. of those risk factors to which the bank is exposed through its activities. These risks can broadly be divided into: RISK MANAGEMENT • risks that the bank is willing to accept, as they can contribute Various types of risk arise from the bank’s operations, such as to higher returns or the achievement of objectives credit risks, interest rate risks, liquidity risks and operational risks. • risks that the bank seeks to minimise, as they cannot be For the purpose of limiting and controlling risk-taking in the expected to contribute to higher returns or the achieve- business, the company’s Board, which is ultimately responsible ment of objectives for internal controls in the company, has established policies

34 VOLVOFINANS BANK 2019 NOTES

The first category includes credit risk, concentration risk (credit leases, which are not guaranteed by the Volvo dealers, should be risk) and residual value risk, which the bank seeks to optimise selective in the sense that the bank’s credit customers must be within the risk appetite defined by the Board in order to achieve of such quality that credit losses can be kept at a low level. The its strategic objectives. quality requirement must never be set aside in an effort to achieve The second category includes operational risk, interest rate a high credit volume. Credit granting in which Volvofinans assumes risk, counterparty risk, reputational risk, liquidity risk and strategic a direct counterparty risk mainly comprises fleet finance, through risk, for which the bank has a low risk appetite. The costs of man- finance or operating leases, for Swedish enterprises. With a strong aging these risks should be proportionate to the direct or indirect focus on credit quality, the bank concludes contracts only with loss that could be incurred if the risk were to materialise. financially stable companies, subject to a thorough credit assess- All risks should be managed both preventively and reactively ment. Volvo­finans has an internally developed scorecard and rules in through good risk management in the first line of defence as well VF Score for expert-based assessment of large companies. All fleet as good risk control in the second line of defence. The risk control customers are assessed in accordance with an expert-based model. function monitors all risks on a regular basis and ensures that they The granting of credit in the car business must be risk assessed remain within the defined risk appetite. such that any expected increase in credit losses, resulting from The bank’s risk management should emphasize preventive any decisions involving increased risk-taking in terms of unsecured measures that are designed to prevent or limit risks and any credit, must always be justified by an expected increase – all other damage. In the products and services offered by the bank, the things being equal – in Volvofinans’ financial return on equity. associated risks should be weighed against the expected return, The bank’s procedures for monitoring overdue payments subject to what is economically justifiable. To achieve good and unsettled receivables are aimed at minimising credit losses profitability while maintaining an acceptable level of risk, the bank through early detection of payment problems among borrowers should use and integrate the results of its internal capital and and prompt handling of the demand process. Overdue debts are liquidity adequacy assessment processes (ICAAP and ILAAP). monitored with the help of specific demand processes which au- Important business decisions must consider the potential conse- tomatically monitor outstanding debts and issue reminders when quences from a risk and capital perspective. a demand measure needs to be taken.

RISK APPETITE CREDITS WITH DEFERMENTS The bank’s measure of overall risk appetite is the total capital OR RENEGOTIATED CONDITIONS ratio, which must not fall below 18.5%. The bank also seeks to In some cases the contract is renegotiated with the customer, maintain a Common Equity Tier 1 capital ratio of at least 14.0%. which may result in the due date being moved forward. A valuation of the financed asset is made when a contract is renegotiated. CREDIT RISK All renegotiated contracts are secured by adequate collateral. Credit risk refers to the risk deemed to exist at any given time At 31 December 2019 the total amount of principal under rene- that the bank’s counterparties, for whatever reason, will fail to gotiated contracts was SEK 14.3 million (18.9). fulfil their contractual obligations in respect of payment. Such There are no contracts for which the principal has been written contracts may refer to various forms of monetary loans, leases, down or remission of interest has been agreed with the borrower. guarantees, investments or derivatives contracts. The Board has overall responsibility for the bank’s credit risk QUANTIFICATION OF CREDIT RISKS exposure. Through a set of instructions, the Board has delegated Within the framework of the bank’s internal ratings-based (IRB) this responsibility to various executives, subject to certain limits. system, the bank’s own estimates of risk parameters will be The bank has defined high ethical, quality and control stand- quantified. These risk estimates are used for granting of credit, ards for its lending activities. Although the credit risk is a large capital adequacy and risk management. The IRB method is risk exposure, the bank’s credit losses have been very small in based on three different risk parameters: probability of default relation to the outstanding loan volume. (PD), loss given default (LGD) and exposure at default (EAD). A Loans from Volvo dealers are made following a credit risk as- conversion factor (CF) is also estimated for calculating EAD for sessment using the credit assessment tool provided by Volvofinans, off-balance sheet exposures. VF Score. VF Score is a proprietary internal risk classification tool Statistical scoring models have been used for retail expo- where externally provided financial information, along with internal sures (private individuals and small and medium-sized limited credit information about the customer, is processed through propri- companies) since January 2007 and for corporate exposures etary scorecards and regulatory frameworks to eventually culminate (companies with sales of over SEK 400 million or exposures with in a risk classification of the customer. Based on the score and the bank of more than SEK 5 million) an expert-based model rules, the tool generates a credit recommendation that is either: was introduced in late 2007. approve, review or reject. Using the recommendation and other For retail exposures the default risk is estimated individually for known information about the customer as a basis, a credit decision each exposure using statistical risk models, which form part of the is then made. In practice, this means that the role that is authorised bank’s risk modelling techniques. Based on the individual risk esti- to make a decision under the credit approval instructions for each mate, each exposure is assigned to a risk category in the PD dimen- unit either approves or rejects the loan. The same approach is used sion. A risk category consists of a number of exposures with similar for Volvofinans’ internally administered credit granting services. risk profiles and risk levels, which have undergone a standardised The granting of credit by Volvofinans in the form of loans and risk process. The bank refers to this process as risk classification.

VOLVOFINANS BANK 2019 35 NOTES

Product categories are used in the LGD and EAD risk dimen- Indicative rating from sions. As regards the LGD dimension, there is an underlying Internal risk category Standard & Poor’s risk category structure for certain products based, for example, 1 AAA to A- on the loan-to-value ratio. An estimate is made of the potential 2 BBB+ to BBB- loss in the financing portfolio for each end customer, even though 3–4 BB+ to B+ the bank has concluded a recourse agreement with each dealer. 5–6 B to B- Under the recourse agreement, the dealer takes over receivables 7 CCC/C for which payment is more than 180 days overdue. Thanks largely Default D to this business model, the bank has incurred negligible credit losses in these portfolios. AVERAGE RISK WEIGHT BY EXPOSURE CLASS For each risk category or product category a risk estimate is Retail exposures calculated that describes the average risk for the category. The The following table shows the average risk weight by risk cate- risk estimates for the risk category include a safety margin that gory for retail exposures (“Other” sub-group). The table shows is designed to take account of uncertainty in the data, data reported exposures for each risk category as well as exposure quality and data access. The risk estimates for the risk category amount, taking account of the conversion factor (CF). are adjusted in response to changes in economic conditions. PD should reflect the business cycle average while LGD/CF should Risk- reflect a period of low economic activity. The bank defines the Risk Reported Exposure weighted Risk period from the early 1990s onwards as a full business cycle. The category exposure amount amount weight, % method used by the bank to adjust risk estimates in the PD di- 1 10,901,830 16,793,548 2,319,079 13.81 mension to changes in economic conditions is designed to keep 2 6,937,619 8,998,774 2,133,947 23.71 PD in each IRB sub-portfolio at a constant level. This means 3–4 4,448,710 4,906,059 1,736,747 35.40 that the adjustment factor changes over time, with the limita- 5–6 1,201,154 1,255,751 608,013 48.42 tion that it is never permitted to fall below 1. The crisis years 7 191,551 195,288 95,242 48.77 in the early 1990s are used as a benchmark for an adverse In default 85,640 89,568 84,635 94.49 economic environment. The bank refers to the above process Total 23,766,504 32,238,988 6,977,663 21.64 as risk category estimation. All of the bank’s models meet the regulatory requirement of at least five years of outcome data. In Excluding the effect of credit risk protection, the total for all its risk category estimation the bank has made very conserva- retail exposure amounts is SEK 33.7 billion rather than SEK tive assumptions and applied wide safety margins for its basic 32.2 billion, as shown in the table. In calculating the higher estimates as well as estimates that have been adjusted for amount, CF has been set at 100% while the lower amount is economic conditions. The aim is to ensure that the estimates based on a CF of 87.0% for private customers and 84.5% for used in determining capital requirements do not result in the corporate customers. credit risk being underestimated. The following chart provides an overview of how expected Corporate exposures loss (EL) for the bank’s retail exposures is affected by the adjust- The following table shows the average risk weight by risk cate- ments that are made in the PD and LGD dimensions. The chart gory for corporate exposures, using the basic internal method. shows that the final estimate is more than 100% larger than the

basic estimate. Risk- Risk Reported Exposure weighted Risk category exposure amount amount weight, % 0.60 % 1 5,677,253 5,719,538 2,519,090 44.04 0.50 % 2 1,923,278 1,939,297 1,710,965 88.23

0.40 % 3–4 1,367,557 1,367,557 1,597,818 116.84 L

E 5–6 357,132 357,132 650,751 182.22 0.30 % 7 110,543 110,543 216,626 195.97 0.20 % In default 18,425 18,425 0 0.00

0.10 % Total 9,454,188 9,512,492 6,695,250 70.38

0.00 % Basic + PD saf. + PD adj. for + LGD saf. + LGD adj. for Excluding the effect of credit risk protection, the total for all margin econ. cond. margin econ. cond. corporate exposure amounts is SEK 10.0 billion rather than SEK 9.5 billion, as shown in the table. The higher amount COMPARISON WITH EXTERNAL RATING AGENCIES includes certain off-balance sheet commitments. The relationship between the rating made by an external credit rating agency (Standard & Poor’s) and the bank’s own risk categories in the PD dimension are presented in the following table. The comparison is indicative only and is not intended to represent any fixed relationship between the bank’s internal risk categories and Standard & Poor’s rating.

36 VOLVOFINANS BANK 2019 NOTES

VALIDATION The Basel Committee limits, among other things, the IRB One of the most important elements of an internal risk classifica- approach for bank exposures, large companies and equity tion system is the validation of the system. The system is validated exposures. It also wants to limit the use of IRB for exposures at least once a year, and responsibility for the validation process and certain counterparty risk and introduce flooring for PD, and implementation is held by the risk control function. LGD and CCF. The validation process must include a documented qualita- Volvofinans anticipates a higher capital requirement due to tive analysis and assessment of the design and use of the risk the new capital floor rules. This is based on preliminary calcu- classification system. A quantitative validation is made of the lations using the new standardised approach as well as further accuracy of the models and measures are taken to ensure that calculations based on new PD and LGD models that the bank no systematic deviations occur. The results and conclusions of is currently developing. For operational risk and interest rate the validation are reported to the Board. risk, VFB also expects to see relatively minor increases in capital The table below shows predictions and outcomes (EL and requirements. LGD are exposure-weighted averages while PD is quanti- The new default management applied from 1 January 2020 ty-weighted for retail exposures and counterparty weighted for will increase default frequency and severity. It will require a more corporate exposures). The significant difference between pre- active credit and demand process in terms of monitoring and dictions and outcomes is due to the conservative assumptions preventive measures. used by the bank in developing the model. Overall, it is difficult to envisage in advance the exact capital ratio in and after 2022, which will be investigated during coming Predictions and years. The current assessments are thus somewhat uncertain, outcomes for IRB although the bank has a very comfortable margin with regard to exposures EL PD LGD capital requirements and the impact is expected to be relatively Pre­ Pre­ Out- Pre­ Out- Exposure class diction diction come diction come marginal. A more significant impact is expected later in the year Retail, other, % 0.47 1.14 0.49 30 13 as the capital floor is phased in. In parallel with Basel IV, a review is taking place of CRR, Corporate, % 0.68 2.30 0.85 45 N/A* CRD4 and BRRD. Some parts of this will affect Volvofinans. The * Prescribed values for LGD are used for corporate exposures primary effects on Volvofinans are listed below: (basic internal method). • For non-system-critical banks, a minimum requirement of a OTHER AREAS OF APPLICATION FOR THE leverage ratio of 3% is being introduced. Higher require- RISK CLASSIFICATION SYSTEM ments may apply to system-critical ones. At 31 December The risk classification system is an integral part of the bank’s 2019, VFB had a leverage ratio of 9.15%. governance, credit, risk management and internal capital • A binding requirement will be introduced for NSFR (stable allocation processes. The bank also uses the system for impair- funding) of 100%. VFB’s NSFR is 143%. ment and risk-adjusted pricing. • For Large exposures, it is planned to limit this to the use of Tier 1 capital instead of eligible capital, which is a FUTURE REGULATIONS broader concept. This will have an impact on Volvofinans, Basel IV: It has been decided that the regulations will be as the limit on unauthorised exposure will be reduced. implemented at different times. The new IRB rules will come into force on 1 January 2022; the capital floor of 72.5% will be CREDIT EXPOSURE phased in over a five-year period (from 2022-2027). The bank’s maximum credit exposure by category of financial instrument is presented below. Maximum credit exposure Basel IV includes: includes undrawn credit card limits and 20% of undrawn dealer • Credit risk (new standardised approach, revised IRB limits. There are no other loan commitments. For derivative requirements, capital floor, interest rate risk in the instruments, an additional amount is calculated based on the banking book) maturity, the nature of the risk and the nominal amount. This is • Market risk (new rules for capital requirement) done for all derivatives, including derivatives with positive and • Operational risk (new method for capital requirement) negative market values. • Other (counterparty risk, CVA risk, etc.)

The new proposals for changed IRB rules are aimed, among other things, at reducing complexity, improving comparability and managing differences in capital requirements.

VOLVOFINANS BANK 2019 37 NOTES

DISTRIBUTION OF EXPOSURES BY TYPE OF COUNTERPARTY All exposures are to Sweden.

Bad debts or receivables in default Credit risk adjustments Credit risk adjustment costs Exposure < 90 days > 90 days 2019 amount past due past due Specific General Specific General Exposures to central banks and institutions Exposures to central governments or central banks 87,816 990 267 - 4 – – – Exposures to regional govern- ments or local authorities 1,531,925 2,786 6 - 607 – – – Exposures to public sector entities 7,613 265 0 - 4 – – – Exposures to institutions 1,361,639 – – – – – – Total exposures to central banks and institutions 2,988,993 4,041 274 - 615 – – –

Exposures to customers Exposures to corporates 252,235 – – – – – – of which exposure to small and medium-sized entities 148,592 – – – – – – Retail exposures 561,506 – – – – – – of which exposure to small and medium-sized entities 403,733 – – – – – – Exposures in default 2,321 – – – – – – Exposures in the form of covered bonds 1,415,921 – – - 309 – – – Equity exposures 18,000 – – – – – – Other items 23,233 – – – – – – Total exposure to customers 2,273,216 – – – – – – Total, standardised approach 5,262,209 4,041 274 - 309 – – –

IRB exposure class Exposures to corporates 9,964,399 85,516 266,263 - 299 – – – Retail exposures 33,779,325 338,651 3,131 - 24,983 – - 15,381 – Non-credit obligation asset exposures 4,034,183 – – – – – – Total, IRB approach 47,777, 9 07 424,167 269,394 - 25,282 – - 15,381 – Total 53,040,116 428,208 269,668 - 26,207 – - 15,381 –

38 VOLVOFINANS BANK 2019 NOTES

Bad debts or Credit risk receivables in default Credit risk adjustments adjustment costs Exposure < 90 days > 90 days 2018 amount past due past due Specific General Specific General Exposures to central banks and institutions Exposures to central governments or central banks 22,476 – 5 - 10 – – – Exposures to regional govern- ments or local authorities 1,355,237 1,401 138 - 642 – – – Exposures to public sector entities 6,126 – 12 - 1 – – – Exposures to institutions 1,723,281 – – – – – – Total exposures to central banks and institutions 3,107,120 1,401 155 - 653 – – –

Exposures to customers Exposures to corporates 245,354 – – – – – – of which exposure to small and medium-sized entities 109,379 – – – – – – Retail exposures 555,408 – – – – – – of which exposure to small and medium-sized entities 409,299 – – – – – – Exposures in default 8,545 – – – – – – Exposures in the form of covered bonds 1,432,023 – – - 312 – – – Equity exposures 30,520 – – – – – – Other items 16,133 – – – – – – Total exposure to customers 2,287,983 – – – – – – Total, standardised approach 5,395,103 1,401 155 - 312 – – –

IRB exposure class Exposures to corporates 9,193,389 62,162 253,171 - 295 – – – Retail exposures 34,030,373 276,042 2,163 - 24,176 – - 15,392 – Non-credit obligation asset exposures 3,921,608 – – – – – – Total, IRB approach 47,145,370 338,204 255,334 - 24,471 – - 15,392 – Total 52,540,473 - 339,605 255,489 - 25,436 – - 15,392 –

VOLVOFINANS BANK 2019 39 NOTES

TOTAL AMOUNT OF ALL EXPOSURES INCLUDING THE RECONCILIATION TO CARRYING EFFECT OF CREDIT RISK PROTECTION AMOUNTS IN THE BALANCE SHEET As shown in the table above, the bank has a total credit risk The following table shows a reconciliation of carrying amounts exposure of SEK 53,040 million (52,540), excluding the effect of assets in the balance sheet to the amounts of exposures for of credit risk protection. The bank’s recourse agreements with credit risk excluding the effect of credit risk protection shown in the dealerships significantly reduce the credit risk. The right of the preceding table. recourse is in the amount of SEK 28,119 million (27,490). The bank also has collateral for loans and receivables in the form of 2019 2018 guarantees of SEK 129 million (129), floating charges of SEK Total assets as per balance sheet 44,035,993 43,376,561 267 million (276), property mortgages of SEK 5 million (2) and

pledged loans and leases of SEK 1,892 million (2,009). The Additional items bank’s total credit risk exposure, including the effect of credit Total impairment 82,580 99,361 risk protection, is thus SEK 22,628 million (22,634). Undrawn limits, accounts receivable 10,262,200 10,138,183 The bank does not use credit risk protection to reduce its Undrawn limits, lending to Volvo dealers 292,045 550,047 capital requirement. Margin for counterparty risk in derivatives 37,032 42,510

Outgoing items Non-credit obligation asset exposures* - 1,654,674 - 1,644,643 Intangible assets - 15,060 - 21,545 Total 53,040,116 52,540,473

* Adjustment of the carrying amount of lease assets which do not give rise to any exposure in capital adequacy reporting.

40 VOLVOFINANS BANK 2019 NOTES

TOTAL EXPOSURE BY EXPOSURE CLASS FOR CREDIT RISK

Gross expo- Average for 2019 sure amount the period Q1 Q2 Q3 Q4 Standardised approach exposure class Exposures to central governments or central banks and institutions 87,816 41,983 25,865 27,360 26,892 87,816 Exposures to regional governments or local authorities 1,531,925 1,456,932 1,419,297 1,346,085 1,530,422 1,531,925 Exposures to public sector entities 7,613 6,581 6,190 6,345 6,175 7,613 Exposures to institutions 1,361,639 2,569,149 3,432,892 2,777,525 2,704,540 1,361,639 Exposures to corporates 252,235 256,755 248,469 255,899 270,415 252,235 Retail exposures 561,506 580,391 584,533 586,844 588,681 561,506 Exposures in default 2,321 1,556 1,676 1,503 727 2,321 Exposures in the form of covered bonds 1,415,921 1,540,961 1,691,666 1,639,032 1,417,226 1,415,921 Equity exposures 18,000 27,390 30,520 30,520 30,520 18,000 Other items 23,233 50,918 83,912 56,402 40,124 23,233 Total 5,262,209 6,532,616 7,525,019 6,727,513 6,615,722 5,262,209

IRB exposure class Exposures to corporates 9,964,399 9,367,168 9,080,389 9,362,374 9,061,511 9,964,399 Retail exposures* 33,779,325 33,796,144 33,901,921 33,855,790 33,647,540 33,779,325 Non-credit obligation asset exposures 4,034,183 4,029,485 3,980,708 4,084,452 4,018,597 4,034,183 Total, IRB approach 47,777, 9 07 47,192,798 46,963,018 47,302,616 46,727,649 47,777, 9 07 Total exposure 53,040,116 53,725,414 54,488,038 54,030,129 53,343,370 53,040,116

* “Retail exposures” includes exposures in the sub-groups “Small and medium-sized enterprises” and “Other retail exposures”.

Gross expo- Average for 2018 sure amount the period Q1 Q2 Q3 Q4 Standardised approach exposure class Exposures to central governments or central banks and institutions 22,476 71,069 98,502 120,561 42,736 22,476 Exposures to regional governments or local authorities 1,355,237 1,465,981 1,554,186 1,492,578 1,461,923 1,355,237 Exposures to public sector entities 6,126 5,852 6,097 5,768 5,418 6,126 Exposures to institutions 1,723,281 1,705,140 2,073,563 1,754,285 1,269,432 1,723,281 Exposures to corporates 245,354 228,639 214 102 220,105 234,993 245,354 Retail exposures 555,408 555,538 524,982 553,580 588,181 555,408 Exposures in default 8,545 11,122 10,268 15,015 10,660 8,545 Exposures in the form of covered bonds 1,432,023 1,408,490 1,105,690 1,466,400 1,629,846 1,432,023 Equity exposures 30,520 29,141 27,159 29,442 29,442 30,520 Other items 16,133 44,795 73,911 56,270 32,867 16,133 Total 5,395,103 5,525,766 5,688,460 5,714,004 5,305,498 5,395,103

IRB exposure class Exposures to corporates 9,193,389 9,222,807 8,850,121 9,539,844 9,307,873 9,193,389 Retail exposures* 34,030,373 33,854,013 33,191,718 34,056,813 34,137,148 34,030,373 Non-credit obligation asset exposures 3,921,608 3,657,987 3,348,037 3,625,292 3,737,009 3,921,608 Total, IRB approach 47,145,370 46,734,806 45,389,877 47,221,949 47,182,030 47,145,370 Total exposure 52,540,473 52,260,572 51,103,881 52,527,447 52,577,133 52,540,473

* “Retail exposures” includes exposures in the sub-groups “Small and medium-sized enterprises” and “Other retail exposures”.

VOLVOFINANS BANK 2019 41 NOTES

DISTRIBUTION OF EXPOSURES BY SECTOR AND EXPOSURE CLASS

Retail: repair of Transport and Legal, financial, 2019 motor vehicles storage etc. activities Other Total Exposures to central governments and central banks – – 258 87,558 87,816 Exposures to local authorities and comparable associations as well as agencies – – – 1,531,925 1,531,925 Exposures to administrative bodies, non­- commercial undertakings and religious associations – – – 7,613 7,613 Institutional exposures – – – 1,361,639 1,361,639 Corporate exposures, standardised and IRB 3,717,414 1,269,738 2,254,550 2,974,932 10,216,634 Corporate exposures, standardised and IRB 1,333,627 2,151,255 1,512,816 29,343,133 34,340,831 Unsettled items 263 178 196 1,683 2,321 Covered bonds – – – 1,415,921 1,415,921 Equity exposures – – – 18,000 18,000 Other items – – – 23,233 23,233 Non-credit obligation asset exposures, IRB – – – 4,034,183 4,034,183 Total 5,051,304 3,421,171 3,767,820 40,799,821 53,040,116

Retail: repair of Transport and Legal, financial, 2018 motor vehicles storage etc. activities Other Total Exposures to central governments and central banks – – 310 22,166 22,476 Exposures to local authorities and comparable associations as well as agencies – – – 1,355,237 1,355,237 Exposures to administrative bodies, non-­ commercial undertakings and religious associations – – – 6,126 6,126 Institutional exposures – – – 1,723,281 1,723,281 Corporate exposures, standardised and IRB 3,388,283 1,044,794 2,034,057 2,971,609 9,438,743 Corporate exposures, standardised and IRB 1,371,290 2,225,149 1,482,557 29,506,785 34,585,781 Unsettled items 924 635 683 6,303 8,545 Covered bonds – – – 1,432,023 1,432,023 Equity exposures – – – 30,520 30,520 Other items – – – 16,133 16,133 Non-credit obligation asset exposures, IRB – – – 3,921,608 3,921,608 Total 4,760,497 3,270,577 3,517,607 40,991,792 52,540,473

42 VOLVOFINANS BANK 2019 NOTES

EXPOSURES, REMAINING TERM TO MATURITY BY EXPOSURE CLASS Contractual remaining term (carrying amount) and expected date of recovery.

Total 2019 0–3 3–6 6–9 9–12 12+ cash flow No term Exposures to central govern- ments or central banks and institutions 61,395 6,707 1,938 2,676 15,099 87,816 – Exposures to regional govern- ments or local authorities 413,244 216,230 247,241 11,421 643,789 1,531,925 – Exposures to public sector entities 617 931 1,680 440 3,946 7,613 – Exposures to institutions 8,629 3,416 3,654 3,836 1,342,103 1,361,639 – Exposures to corporates 2,350,933 951,585 529,421 956,172 5,428,523 10,216,634 – Retail exposures 13,823,175 2,105,852 597,100 2,015,470 15,799,234 34,340,831 – Exposures in default 2,321 – – – – 2,321 – Exposures in the form of covered bonds 1,921 232,000 50,000 403,000 729,000 1,415,921 – Equity exposures – – – – – – 18,000 Other items – – – – – – 23,233 Non-credit obligation asset exposures, IRB 341,373 499,629 434,400 504,215 2,232,794 4,012,411 21,772 Total 17,003,608 4,016,350 1,865,434 3,897,230 26,194,488 52,977,111 63,005

Total 2018 0–3 3–6 6–9 9–12 12+ cash flow No term Exposures to central governments or central banks and institutions 15,162 2,869 1,821 2,335 289 22,476 – Exposures to regional govern- ments or local authorities 164,521 167,242 104,401 11,562 907,511 1,355,237 – Exposures to public sector entities 574 320 1,360 570 3,302 6,126 – Exposures to institutions 10,850 3,330 3,978 3,864 1,701,260 1,723,281 – Exposures to corporates 1,831,088 876,280 723,458 808,770 5,199,147 9,438,743 – Retail exposures 13,729,082 2,054,563 567,529 2,123,035 16,111,571 34,585,781 – Exposures in default 8,545 – – – – 8,545 – Exposures in the form of covered bonds 6,023 101,000 272,000 102,000 951,000 1,432,023 – Equity exposures – – – – – – 30,520 Other items – – – – – – 16,133 Non-credit obligation asset exposures, IRB 318,922 474,431 395,337 489,643 2,225,782 3,904,115 17,493 Total 16,084,767 3,680,034 2,069,885 3,541,779 27,099,862 52,476,327 64,146

VOLVOFINANS BANK 2019 43 NOTES

CREDIT RISK EXPOSURE BROKEN DOWN BY CREDIT RATING AND VALUE OF COLLATERAL The table below shows the bank’s gross and net credit risk exposure by credit rating in order to create an understanding of the bank’s credit risk concentrations. This information is then followed by a further table showing the bank’s collateral per financial instrument.

CREDIT RISK EXPOSURE BY CREDIT RATING OF FINANCIAL ASSETS AND LOAN COMMITMENTS

Stage 3 (not purchased or issued, cred- 31 Dec 2019 Stage 1 Stage 2 it-impaired) Total Chargeable treasury bills AAA to AA 1,430,484 – – 1,430,484 Loss provision - 535 – – - 535 Total carrying amount 1,429,949 – – 1,429,949

Loans and advances to customers Low risk 13,414,836 12,866 3,416 13,431,118 Normal risk 2,731,820 98,808 5,374 2,836,002 Increased risk 204,949 339,994 7,155 552,098 High risk 106,259 318,136 10,569 434,964 Defaulted – – 48,886 48,886 Loss provision - 9,497 - 8,164 - 7,326 - 24,987 Total carrying amount 16,448,367 761,640 68,074 17,278,081

Bonds and other debt securities AAA to AA 1,415,921 – – 1,415,921 A+ to A- 933,940 – – 933,940 Loss provision - 309 – – - 309 Total carrying amount 2,349,552 – – 2,349,552

Other financial assets Low risk 333,155 – 30,188 363,343 Normal risk 49,698 218 450 50,366 Increased risk 7,884 2,084 876 10,844 High risk 826 606 – 1,432 Defaulted – – 2,928 2,928 Loss provision - 2 - 0 - 29 - 31 Total carrying amount 391,561 2,908 33,087 428,882 Total gross carrying amount for financial assets valued at amortised cost 20,629,772 772,712 109,843 21,512,327 Total loss provision - 10,343 - 8,164 - 7,356 - 25,863 Total carrying amount 20,619,429 764,548 102,487 21,486,464

44 VOLVOFINANS BANK 2019 NOTES

Stage 3 (not purchased or issued, cred- 31 Dec 2018 Stage 1 Stage 2 it-impaired) Total Chargeable treasury bills AAA to AA 1,246,400 – – 1,246,400 Loss provision - 584 – – - 584 Total carrying amount 1,245,816 – – 1,245,816

Loans and advances to customers Low risk 12,863,971 18,959 113 12,883,044 Normal risk 2,937,819 98,933 7,354 3,044,106 Increased risk 169,277 349,075 867 519,219 High risk 83,338 274,815 12,239 370,392 Defaulted – – 130,193 130,193 Loss provision - 9,275 - 8,364 - 6,554 - 24,193 Total carrying amount 16,045,130 733,418 144,212 16,922,760

Bonds and other debt securities AAA to AA 1,432,023 – – 1,432,023 A+ to A- 800,260 – – 800,260 Loss provision - 316 – – - 316 Total carrying amount 2,231,967 – – 2,231,967

Other Financial assets Low risk 393,766 27 29,381 423,174 Normal risk 42,520 53 – 42,573 Increased risk 3,356 130 – 3,486 High risk 634 923 – 1,557 Defaulted – – 1,163 1,163 Loss provision - 2 0 - 45 - 47 Total carrying amount 440,274 1,133 30,499 471,906 Total gross carrying amount for financial assets valued at amortised cost 19,973,364 742,915 181,310 20,897,589 Total loss provision - 10,177 - 8,364 - 6,599 - 25,140 Total carrying amount 19,963,187 734,551 174,711 20,872,449

VOLVOFINANS BANK 2019 45 NOTES

MAXIMUM EXPOSURE TO CREDIT RISK AND VALUE OF COLLATERAL FOR FINANCIAL ASSETS THAT ARE SUBJECT TO LOSS PROVISIONS IN ACCORDANCE WITH IFRS 9.

Credit risk exposure (before Carrying Value of Gross and net credit risk exposure, 31 December 2019 impairment) Loss provision amount collateral Chargeable treasury bills, etc. AAA to AA 1,430,484 - 535 1,429,949 – Total 1,430,484 - 535 1,429,949 –

Loans and advances to customers Lending against collateral of: Other 17,303,068 - 24,987 17,278,081 14,638,428 Total 17,303,068 - 24,987 17,278,081 14,638,428

Bonds and other debt securities AAA to A- 2,349,861 - 309 2,349,552 – Total 2,349,861 - 309 2,349,552 –

Other assets Receivables 428,913 - 31 428,882 – Total 428,913 - 31 428,882 – Issued loan promises 10,554,245 – – – Total credit risk exposure 32,066,571 - 25,863 21,486,464 14,638,428

Credit risk exposure (before Carrying Value of Gross and net credit risk exposure, 31 December 2018 impairment) Loss provision amount collateral Chargeable treasury bills, etc. AAA to AA 1,246,400 - 584 1,245,816 – Total 1,246,400 - 584 1,245,816 –

Loans and advances to customers Lending against collateral of: Other 16,946,953 - 24,193 16,922,760 14,609,701 Total 16,946,953 - 24,193 16,922,760 14,609,701

Bonds and other debt securities AAA to A- 2,232,283 - 316 2,231,967 – Total 2,232,283 - 316 2,231,967 –

Other assets Receivables 471,952 - 47 471,906 – Total 471,952 - 47 471,906 – Issued loan promises 10,688,229 – – – Total credit risk exposure 31,585,817 - 25,140 20,872,449 14,609,701

The bank’s collateral for loans and advances to customers consist of transferred car and truck loans where there are recourse agreements with dealers. As at 31 December 2019, the bank had no financial instruments for which the loss provision had been reported as zero due to collateral received. For maximum exposure to credit risk for financial assets that are not subject to loss provision, including derivatives and related collateral, see Note 36.

46 VOLVOFINANS BANK 2019 NOTES

PORTFOLIO CHANGES IN RESPECT OF SPECIFIC CREDIT ADJUSTMENTS The following table presents the bank’s changes in respect of credit risk adjustments from the beginning of the year until the end of the year.

31 Dec 2019 31 Dec 2018 Cumulative specific Cumulative specific Amounts in SEK million credit adjustments credit adjustments Opening balance 25,436 27,660 Increases in expected credit losses for new contracts 2,490 2,359 Decrease in expected credit losses on completed contracts - 6,335 - 6,602 Decrease in expected credit losses during the period - 653 - 3,180 Increase in expected credit losses during the period 356 544 Migrations between stage 1, stage 2 and stage 3 4,914 4,655

Closing balance 26,207 25,436 Repayment of previous actual credit losses in the income statement 2,277 2,175 Actual credit losses in the income statement 17,658 17,567

COUNTERPARTY RISK outstanding derivative instruments. The Agreement also gives Counterparty risk arises when the bank has entered into a deriv- the party that receives collateral the right in turn to dispose of ative contract with a counterparty and refers to the risk that the collateral received. counterparty will be unable to fulfil its contractual obligations. If The size of the counterparty risk is affected by the market value the contract has a positive market value a default by the counter- and varies with changes in market interest rates. The market party would result in a loss for the bank. The bank enters into de- value of swap agreements is determined using discounted cash rivatives solely for the purpose of eliminating interest rate risk and flows. The discount rates are based on official market rates. To foreign exchange risk in interest-bearing lending and borrowing. account for the risk that the settlement amount will differ from Counterparty risk arises from hedging of Volvofinans’ interest the bank’s estimated market value in case of default, a margin rate risk using derivatives. The bank’s derivatives currently is added. The margin is determined using various standard- consist of interest rate swap agreements and interest rate and ised approaches depending on the nature of the underlying currency swap agreements. instrument and the term of the contract. The nominal amounts The bank only uses counterparties with which it has entered of contracts with positive as well as negative values are used into a financing agreement and which have a high rating. The to calculate the margin. At year-end, the bank’s compensation bank’s financial policy specifies limits for counterparty risk, which for counterparty risk in interest rate and exchange rate swaps are monitored continuously. In the event that a counterparty risk was SEK 11,022 (12,999). The margin was calculated at SEK exceeds the limit as a result of market movements, no new deals 37,032 (42,510). The nominal amount of the bank’s outstand- may be concluded until the counterparty has posted adequate ing derivatives at year-end was SEK 2,715 million (2,973). The collateral for counterparty risk in excess of the limit. Financial following table shows the bank’s counterparty exposure, i.e. derivative contracts have been entered into with the bank’s the compensation (market value) and the margin for potential counterparties­ through international swap agreements, ISDA changes in the risk by credit rating category on Moody’s scale. agreements. To limit counterparty risk, Close Out Netting is applied to Amounts in SEK all ISDA agreements with all derivative counterparties. Close million 2019 2018 Out Netting means that the positive and negative values of all Rating Rating (short- (long- Compen- Compen- derivatives with the same counterparty are netted in the event term) term) sation Margin sation Margin of default. Credit Support Annex (CSA) is an annex to the ISDA P-1 Aa1 – – – – agreement that establishes a system for transfer of collateral P-1 Aa2 0.3 1.0 0.1 0.7 between the parties to limit the counterparty risk arising from P-1 Aa3 1.3 34.5 0.7 37.0 derivatives transactions. Under the European Markets Infra- P-1 A1 – – – – structure Regulation (EMIR), the bank is required to exchange P-1 A2 – – 12.2 4.8 variation margin with counterparties for non-cleared OTC P-2 A3 9.4 1.5 – – derivatives. The bank has therefore entered into a supplemen- Total 11.0 37. 0 13.0 42.5 tary agreement, CSA for Variation Margin to ISDA Agreement, whereby the parties mutually undertake to provide collateral in the form of liquid funds for the counterparty’s surplus value in

VOLVOFINANS BANK 2019 47 NOTES

ENCUMBERED ASSETS available for encumbrance in the ordinary course of business at around 90%. The bank’s encumbered assets comprise collat- The tables below present the required disclosures on encum- eral received in the form of bank deposits in accordance with bered and unencumbered assets in accordance with the EBA CSA for variation margin under the ISDA agreements. The guidelines. In addition to debt securities, the bank’s unencum- liabilities corresponding to the collateral received comprise bered assets mainly comprise hire purchase agreements and exposures to counterparties in derivatives transactions under contract credits, credit card credits, card credits, property, plant standard ISDA terms. Volvofinans Bank has not pledged any and equipment such as lease assets, intangible assets (projects collateral received. in progress), shares, equipment and trade receivables. The bank estimates the share of these items not considered to be

Encumbered Collateral received assets, Encumbered Unencumbered Unencumbered Encumbered collateral or own issued debt carrying assets, assets, assets, received or own debt securities available for 2019 amount fair value carrying amount fair value securities, fair value encumbrance, fair value Assets – – 44,035,993 – – – Equity instruments – – – – – – Debt securities – – 3,780,345 – – – Other assets – – 40,255,648 – – – Other collateral received – – – – – –

Encumbered assets, collateral received and own Matching liabilities, contingent debt securities issued with the exception of covered bonds 2019 liabilities or securities on loan and asset-backed securities Assets 5,069 8,480

Encumbered Collateral received assets, Encumbered Unencumbered Unencumbered Encumbered collateral or own issued debt carrying assets, assets, assets, received or own debt securities available for 2018 amount fair value carrying amount fair value securities, fair value encumbrance, fair value Assets – – 43,376,561 – – – Equity instruments – – – – – – Debt securities – – 3,478,683 – – – Other assets – – 39,897,878 – – – Other collateral received – – – – – –

Encumbered assets, collateral received and own Matching liabilities, contingent debt securities issued with the exception of covered bonds 2018 liabilities or securities on loan and asset-backed securities Assets 4,511 4,350

48 VOLVOFINANS BANK 2019 NOTES

CONCENTRATION RISK reserves. At 31 December 2019, the interest rate risk was SEK 75.4 million (89.9), representing 1.9% (2.4) of the capital base. The bank’s definition of concentration risk refers to: An assumption is also made of a reasonable change in interest • Large exposures to customers or groups of connected rates and a 0.25 percentage point parallel shift in the yield curve, customers. which would have an estimated impact on net interest income • Large exposures to groups of counterparties for which the over a 12-month period of SEK 18.8 million (22.5). The bank probability of default is connected with factors such as considers these stress tests to be proportionally reliable for sector, geographic area, etc. measuring Volvofinans’ net interest rate risk. Interest rate risk is • Concentration in a certain type of collateral, e.g. a certain also measured as the impact on the economic value of equity. To car make. identify the parallel and non-parallel gap risk for the economic value, six interest rate shock scenarios are used. The interest The bank’s portfolio is not very diversified, as it largely consists rate shock scenarios applied are parallel shock up and down, of different forms of car finance, creating a concentration risk to steepener shock (short rates down and long rates up), flattener cars as collateral. The bank’s activities are also concentrated to shock (short rates up and long rates down) and short rates the Swedish market. shock up and down. Assuming a 2 percentage point parallel The 30 largest customers account for 10.3% (9.4) of total shock, the impact on the economic value at 31 December 2019 lending. The sector in which the bank has the single largest is SEK 9.6 million (17.3). amount of lending is Trade/Repair of motor vehicles, which In cases where customers wish to redeem fixed-rate loans makes up 10.42% of total lending. The bank uses a system early, and where the bank is unable to charge early redemption which enables it to obtain an easy overview of its overall fees, this creates an interest rate risk exposure, or “option risk”. counterparty­ exposure. The bank monitors such lending exposure on a monthly basis MARKET RISK and makes ongoing provisions to hedge the risk. It is assumed INTEREST RATE RISK IN THE BANKING BOOK that 20% of the average credit volume for the year will be re- deemed, when 12 months of the original average maturity of the The bank defines interest rate risk as the present and future risk portfolio has passed, in case of a 1.5 percentage point decline of a decline in net interest income due to unfavourable changes in interest rates. in interest rates owing to the differing fixed-rate terms of loans Basis risk in the banking book arises from an interest rate and deposits. All interest rate risk managed by Volvofinans is in- risk perspective when positions with similar interest rate fixing terest rate risk in the banking book, and there is thus no trading dates are reset against different interest rate indices on the book. Interest rate risk is divided into its various components: asset and liability sides. Interest rate indices include IBOR rates gap risk, basis risk and option risk. The bank endeavours to mini- (STIBOR, NIBOR, etc.) with different maturities. The bank’s var- mise interest rate risk by matching fixed-rate terms of borrow- iable rate lending and borrowing mainly have 3-month STIBOR ings with those of loans. If the bank conducts borrowings with as the base rate, which means that the basis risk is negligible. long fixed-rate terms, interest rate swaps are used to manage The debt, which has a nominal amount of SEK 13.4 billion, con- the resulting interest rate risk. Fixed-rate loans accounted for sists of market borrowings and liabilities to credit institutions. SEK 1.9 billion, or 5%, of total funding at 31 December 2019. The asset side consists of loans and advances to customers Swap agreements are also used in cases where loans are issued and derivatives of SEK 31 billion and securities assets of SEK at fixed rates, which occurs to a very limited extent, with such 2.4 billion. The bank also has loan assets of SEK 0.6 million that loans accounting for just 0.6% (0.4) of total lending at year-end. are exposed to the 1-month STIBOR reference rate. The bank’s lending and borrowing mainly have short fixed-rate terms not exceeding 3 months. The bank’s financial policy stipulates the allowable level of interest rate risk. It is updated as necessary and decided by the Board. Interest rate risk is reported to the Board on an ongoing basis. The bank’s interest rate risk management follows the EBA guidelines on management of interest rate risk outside the trading book. The bank stress-tests the interest rate risk in its assets, liabilities and cash flows from derivative instruments on a monthly basis. A gap analysis shows the impact on net interest income over a 12-month period from an interest rate shock resulting in an immediate parallel shift in the yield curve of 1 percentage point. The financial policy prescribes limits for the size of this impact in relation to earnings and the size of the gaps for each time period. The time periods are divided into 19 time pockets with intervals ranging from 1 day up to 5 years. In this calculation no term has been used for equity including untaxed

VOLVOFINANS BANK 2019 49 NOTES

FIXED-RATE TERMS FOR THE GROUP’S INTEREST-BEARING ASSETS AND LIABILITIES

31 Dec 2019

SEKm Non- interest- Assets O/N O/N≤1M 1M ≤ 3M 3M ≤ 6M 6M ≤ 9M 9 ≤ 1Y 1Y ≤ 1.5Y 1.5Y≤2Y 2Y ≤ 3Y 3Y ≤ 4Y 4Y ≤ 5Y 5Y ≤ 6Y > 6Y bearing Total

Payable treasury bills 1,430 1,430

Loans and advances to credit institutions 1,281 1,281

Lending* 37,610 84 4 8 7 25 21 97 30 23 18 37,927

Bonds and other debt securities 563 1,787 2,350

Shares and interests in associates and other companies 11 11

Shares and interests in Group companies 7 7

Intangible assets 15 15

Property, plant and equipment, fixtures and fittings 12 12

Other assets 936 936

Prepaid expenses and accrued income 67 67

Total assets 39,454 3,301 4 8 7 25 21 97 30 23 18 1,048 44,036

SEKm Non- Liabilities and interest- equity O/N O/N≤1M 1M ≤ 3M 3M ≤ 6M 6M ≤ 9M 9 ≤ 1Y 1Y ≤ 1.5Y 1.5Y ≤ 2Y 2Y ≤ 3Y 3Y ≤ 4Y 4Y ≤ 5Y 5Y ≤ 6Y > 6Y bearing Total

Liabilities to credit institutions - 1,593 - 1,593

Retail deposits and borrowings - 21,217 - 21,217

Securities issued - 4,297 - 6,992 - 300 - 799 - 401 - 303 - 13,092

Other liabilities - 1,256 - 1,256

Accrued expenses and deferred income - 1,306 - 1,306

Subordinated debts - 400 - 400

Untaxed reserves - 4,626 - 4,626

Equity - 546 - 546

Total liabilities - and equity 21,217 - 4,697 - 8,585 - 300 - 799 - 401 - 303 - 7,734 - 44,036

Derivative instruments - 477 - 818 - 4 800 - 5 - 53 290 256 - 11

Net assets and - liabilities 21,217 34,280 - 6,102 - 300 8 8 20 - 32 - 14 - 17 23 18 0 - 6,686

Cumulative - exposure 21,217 13,063 6,961 6,661 6,669 6,677 6,697 6,665 6,651 6,634 6,657 6,675 6,675 - 11

* Consists of Loans and advances to customers and Property, plant and equipment, lease assets

50 VOLVOFINANS BANK 2019 NOTES

31 Dec 2018

SEKm Non- interest- Assets O/N O/N≤1M 1M ≤ 3M 3M ≤ 6M 6M ≤ 9M 9 ≤ 1Y 1Y ≤ 1.5Y 1.5Y ≤ 2Y 2Y ≤ 3Y 3Y ≤ 4Y 4Y ≤ 5Y 5Y ≤ 6Y > 6Y bearing Total

Payable treasury bills 77 1,169 1,246

Loans and advances to credit institutions 1,623 1,623

Lending* 37,028 90 4 8 15 23 20 56 18 3 15 37,280

Bonds and other debt securities 403 1,829 2,232

Shares and interests in associates and other companies 24 24

Shares and interests in Group companies 7 7

Intangible assets 22 22

Property, plant and equipment, fixtures and fittings 6 6

Other assets 887 887

Prepaid expenses and accrued income 51 51

Total assets 39,131 3,088 4 8 15 23 20 56 18 3 15 997 43,377

SEKm Non- Liabilities and interest- equity O/N O/N≤1M 1M ≤ 3M 3M ≤ 6M 6M ≤ 9M 9 ≤ 1Y 1Y ≤ 1.5Y 1.5Y ≤ 2Y 2Y ≤ 3Y 3Y ≤ 4Y 4Y ≤ 5Y 5Y ≤ 6Y > 6Y bearing Total

Liabilities to credit institutions - 2,083 - 2,083

Retail deposits and borrowings - 18,218 - 18,218

Securities issued - 4,758 - 8,520 - 100 - 299 - 352 - 801 - 400 - 302 - 15,532

Other liabilities - 1,079 - 1,079

Accrued expenses and deferred income - 1,303 - 1,303

Subordinated debts - 400 - 400

Untaxed reserves - 4,128 - 4,128

Equity - 632 - 632

Total liabilities and equity - 18,218 - 5,158 - 10,603 - 100 - 299 - 352 - 801 - 400 - 302 - 7,142 - 43,377

Derivative instruments - 765 - 1,248 - 2 288 339 800 - 90 400 245 - 33

Net assets and liabilities - 18,218 33,208 - 8,763 - 98 8 4 10 19 - 34 18 - 54 15 0 - 6,145

Cumulative exposure - 18,218 14,990 6,227 6,129 6,137 6,141 6,151 6,170 6,136 6,154 6,100 6,115 6,115 - 30

* Consists of Loans and advances to customers and Property, plant and equipment, lease assets

VOLVOFINANS BANK 2019 51 NOTES

CURRENCY RISK OPERATIONAL RISKS Foreign exchange risk arises in cases where the bank chooses to Operational risk refers to the risk of loss due to: borrow or lend money in foreign currency. The financial policy • Inappropriate or failed internal processes states that no foreign exchange risk may exist. When borrowing • Human error in foreign currency, the bank enters into interest rate and currency • Defective systems swap agreements to eliminate the foreign exchange risk. Effective • External events elimination of the foreign exchange risk is achieved by ensuring The definition also includes legal risk. that the terms, nominal amounts and interest payment dates of Operational risks have been divided into the following areas: the concluded agreements match the terms of the bank’s foreign internal irregularities, external crime, employment conditions and currency financing. However, there may be an impact on earnings work environment, business conditions, disruptions and interrup- during the term due to differences in the valuation methods used tions in operations and systems, transaction management and for the hedged item and hedging derivative. Volvofinans has process control, technology and employees/organisation. entered into interest rate and exchange rate swap agreements Operational risks exist in all activities of the bank and in its with a nominal value of SEK 650 million (650) as at 31 Decem- interaction with external parties. To identify operational risks, the ber 2019. There is no lending in foreign currency. The bank’s bank arranges risk identification and self-assessment work- currency exposure amount at year-end was 0 (0). For carrying shops with key individuals in the company on a regular basis. amounts of assets and liabilities in foreign currency, see Notes All identified operational risks are categorised based on their 27 (Derivatives – Assets and Liabilities) and 29 (Liabilities to management and impact as “low”, “medium” or “high” risk. credit institutions and securities issued). The management of operational risks is governed by the opera- tional risk policy. RESIDUAL VALUE RISK The objective is to eliminate or prevent, limit and/or compen- Residual value risk is the risk that the residual value of a vehicle sate for the risk of damage through a deliberate and organised guaranteed by the bank on the last day of the lease will be approach involving the use of governing documents, policies and higher than the actual market value, and that the bank will thus processes for managing operational risks. The management of incur a loss. At 31 December 2019 the bank had recognised an operational risk is an ongoing process involving the use of tools impairment loss of SEK 56.4 million (73.9) related to residual such as self-assessments and incident reporting to capture risks value risk, which is included in depreciation and impairment that have occurred, and to identify, monitor and address ongoing of property, plant and equipment. Guaranteed residual values operational risks in accordance with the process below. amounted to SEK 5,472 million (4,983), which includes both Volvofinans’ Board of Directors and management have overall own and transferred contracts. The carrying amount of operating responsibility for operational risk and for creating a high level leases directly guaranteed by the bank was SEK 4,336 million of risk awareness at Volvofinans. The departments are primarily (4,052) at 31 December 2019. The guaranteed residual value of responsible for managing operational risks in their own areas these contracts amounted to SEK 2,896 million (2,525). of activity. All employees also have a duty to protect the assets managed by the bank from damage, abuse or loss. EQUITY RISK IN OTHER OPERATIONS Incidents are reported in an incident management system. The shareholding consists of unlisted shares valued at cost The risk control unit is responsible for collating all reported using the cost method. incidents and for monitoring and controlling operational risks. Risk control is also responsible for compiling information on op- 2019 2018 erational risks and reporting to the CEO and Board of Directors Balance sheet value (using incident reports, KRIs and risk reports), and for following Associates and other companies 12,258 23,777 up risk limitation measures from the self-assessments and Group companies 6,742 6,742 monitoring changes in the operations that may lead to a change Total 19,000 30,519 in exposure to operational risk.

Fair value Associates and other companies 12,258 23,777 Group companies 6,789 6,789 Total 19,047 30,566

Unrealised gain or loss Associates and other companies 7,926 17,446 Group companies – – Total 7,926 17,446

52 VOLVOFINANS BANK 2019 NOTES

PENSION RISKS is revised on an ongoing basis and submitted for approval by The bank’s pension plans are secured through an insurance the Board annually. The bank’s Treasurer is responsible for policy with Alecta. In view of the provisions on old-age pensions ensuring that the document is updated. The financial policy and family pensions in the ITP 2 supplementary pension plan, and governing document are fundamental to the activities of the bank’s pension plan is considered a multi-employer defined the Treasury, but are available to all employees. Stress tests of benefit pension plan. Under Recommendation UFR 10 of the the liquidity risk are performed as part of the bank’s ICAAP and Swedish Financial Reporting Board, however, there is no basis ILAAP processes and on several occasions during the course for recognising an ITP 2 plan that is funded through an insurance of the year. policy with Alecta as a defined benefit plan, and it should therefore Operational activities for managing liquidity risk are be accounted for as a defined contribution plan in accordance with performed in the bank’s Treasury, where the bank’s liquidity IAS 19. The bank’s obligations in respect of defined contribution position is monitored on a day-to-day basis. Analysis and internal plans are recognised as an expense in the income statement. Pen- reporting of maturity structure and funding requirements are sion premiums for 2019 amounted to 20,091 (18,340), of which performed on an ongoing basis, all with the aim of ensuring a 10,462 (9,741) refers to Alecta ITP 2 pensions. strong liquidity position and minimising the impact in the event of In the traffic light method used by the Swedish FSA for pen- liquidity problems. The bank’s net cash outflows are also reported sion risk in Pillar 2 baseline requirements assets and liabilities to ensure that the bank’s risk tolerance is not exceeded and that are measured at fair value. Fair value is determined using market accumulated cash flows remain within defined limits. Reports on valuations of assets while liabilities are measured using best liquidity risk are compiled by the bank’s accounts department in estimates of retirement benefit obligations. The company is then close collaboration with the Treasury and reported to the Swedish exposed to a number of stress scenarios defined by the FSA. Financial Supervisory Authority on a monthly and quarterly basis. The bank’s liquidity coverage ratio (LCR) at year-end, as LIQUIDITY RISK calculated in accordance with Article 415 of the EU’s Capital Liquidity risk is the risk that the bank will be unable to fulfil its Requirements Regulation (CRR), was 257% and averaged payment obligations at maturity without incurring a significantly 292% in 2019. LCR is a short-term liquidity ratio and forms higher payment method cost or, in the worst case, that it will be part of the bank’s liquidity risk reporting to the regulators. The unable to fulfil its payment obligations at all. bank’s net stable funding ratio (NSFR) at year-end was 143% Liquidity risk arises when lending and borrowing has miss and averaged 145% in 2019. matched maturities. When lending has longer maturity than bor- The bank maintains a liquidity reserve to ride out periods of rowing multiple rounds of refinancing are required are required. strained refinancing conditions. At year-end this reserve stood If the need for refinancing on any individual day becomes signif- at SEK 5.1 billion (5.1). The reserve, whose composition is regu- icant, or if capital markets becomes illiquid, this could result in a lated in the financial policy, should consist of high-quality liquid shortfall of liquidity. debt securities and demand deposits with banks in Swedish Liquidity risk is managed in accordance with the bank’s kronor. The securities portion had a nominal amount of SEK financial policy. The policy describes financial risks, including 3.8 billion (75%) while deposits at other banks amounted to liquidity risk, and specifies the permissible liquidity risk. The SEK 1.3 billion (25%). The size of the liquidity reserve should CEO is responsible for ensuring that the policy is updated as be such as to ensure that the company is able to continue required and presented for adoption by the bank’s Board of operating without hindrance in case of serious liquidity strains, Directors. In addition to the financial policy, the bank has es- with no injection of new external funding, for a period of at tablished a framework for management of liquidity risk, which least three months by using only the funds available in the is a governing document containing guidelines, instructions reserve. Furthermore, the bank’s liquidity reserve must always and strategies for the management of liquidity risk. The bank’s be at least 10% in relation to lending; at 31 December 2019, liquidity and financing strategy and contingency plan constitute this ratio was 13% (14). central parts of the aforementioned document. The framework

VOLVOFINANS BANK 2019 53 NOTES

LIQUIDITY RESERVE OTHER LIQUIDITY-CREATING FACILITIES

Amounts in SEK million, securities at Undrawn limits, SEKm 31 Dec 2019 31 Dec 2018 market value 31 Dec 2019 31 Dec 2018 Overdraft facilities with credit institutions 200 200 Deposits with other banks 1,281 1,623 Credit facilities with credit institutions Securities issued by local authorities and shareholders 4,250 4,250 and other public sector entities 1,430 1,246 Total 4,450 4,450 Other covered bonds 1,416 1,432 Securities issued by Under the bank’s financial policy, all short-term borrowings (<1 non-financial corporations 934 800 year) and 20% of deposits must be covered by credit facilities Total 5,061 5,101 and the liquidity reserve. The bank also strives to diversify its sources of borrowing, with regard to both the forms of borrowing Of the bank’s total liquidity reserve of SEK 5,061 million, SEK and geographic markets. To obtain an appropriate distribution of 4,127 million was accounted for by securities and deposits loan maturities, the amount falling due in any individual calendar with other banks which qualify as liquidity reserve in accordance week is limited. The proportion of long-term borrowing in the with the Swedish Financial Supervisory Authority’s regulations form of market borrowings and bank credits must be at least (FFFS 2010:7) on management of liquidity risk. 60%. On 31 December 2019 it was 69% (81). The bank’s credit facilities constitute a significant complement In order to reduce the share of market borrowing, and thus to the liquidity reserve. These back-up facilities have mostly been also the refinancing risk, Volvofinans Bank has an online savings agreed with the bank’s core banks. The back-up facilities are not account. It is intended for private individuals and deposits account normally used and stood at SEK 4.3 billion (4.3) at year-end. for nearly half of the bank’s financing. The majority of the bank’s Facilities with an option to demand same-day payment total SEK savings account customers are customers with which the bank 1.3 billion; otherwise payment is made 2–3 business days has an existing relationship, i.e. customers that have previously after the demand. The agreements do not contain any material used Volvofinans Bank’s other services. At year-end, the propor- adverse change (MAC) clauses or financial covenants that could tion of relational customers who had held a savings account for prevent the bank from drawing on the facilities. 12 months or more was 87% (89) of savings account volume. Although the savings account has no term, this deposit volume has been very stable over time, as it is spread across a large number of depositors. The bank’s savings account is covered by the government’s deposit guarantee scheme.

54 VOLVOFINANS BANK 2019 NOTES

LIQUIDITY EXPOSURE – CONTRACTUAL REMAINING TERM (NOMINAL AMOUNTS) The interest flows in the table below are based, in case of variable-rate loans and borrowings, on the interest rate at the balance sheet date.

2019 More than 3 More than More than Payable on Less than 3 months and 1 years and 3 years and More than 5 SEKm demand months up to 1 year up to 3 years up to 5 years years Total Financial assets Chargeable treasury bills – 402 448 580 – – 1,430 Loans and advances to credit institutions 1,281 – – – – – 1,281 Loans and advances to customers – 4,986 7,614 13,247 3,764 715 30,326 Bonds and other debt securities – 937 690 725 – – 2,352 Property, plant and equipment, lease assets – 851 3,412 4,682 112 4 9,061 Other assets, derivatives – 5 2 5 3 – 15 Total 1,281 7,1 81 12,166 19,239 3,879 719 44,465

Financial liabilities Liabilities to credit institutions – 344 330 735 209 – 1,618 Retail deposits and borrowings 21,217 – – – – – 21,217 Securities issued – 1,127 2,935 6,638 2,619 – 13,319 Other liabilities, derivatives – - 2 - 8 - 21 44 – 13 Subordinated debts – 1 5 13 13 424 456 Total 21,217 1,470 3,262 7,365 2,885 424 36,623

Net cash flow 19,936 5,711 8,904 11,874 994 295 Undrawn credit facilities 1,450 4,250 3,750 2,000 – – Liquidity gap 18,486 9,961 12,654 13,872 994 295

2018 More than 3 More than More than Payable on Less than 3 months and 1 years and 3 years and More than 5 SEKm demand months up to 1 year up to 3 years up to 5 years years Total Financial assets Chargeable treasury bills – 148 251 844 – – 1,243 Loans and advances to credit institutions 1,623 – – – – – 1,623 Loans and advances to customers – 2,235 7,290 13,260 3,867 764 27,416 Bonds and other debt securities – 801 475 951 – – 2,227 Property, plant and equipment, lease assets – 806 3,286 4,595 144 6 8,837 Other assets, derivatives – 6 4 16 9 – 35 Total 1,623 3,996 11,306 19,666 4,020 770 41,381

Financial liabilities Liabilities to credit institutions – 121 584 1,034 276 95 2,110 Retail deposits and borrowings 17,979 – 240 – – – 18,219 Securities issued – 627 2,067 7,088 6,001 – 15,783 Other liabilities, derivatives – 2 10 22 - 35 – - 1 Subordinated debts – 1 3 8 8 418 438 Total 17,979 751 2,904 8,152 6,250 513 36,549

Net cash flow - 16,356 3,245 8,402 11,514 - 2,230 257 Undrawn credit facilities 1,450 4,250 1,750 750 - - Liquidity gap - 14,906 7,495 10,152 12,264 - 2,230 257

VOLVOFINANS BANK 2019 55 NOTES

MATURITY ANALYSIS OF LIABILITIES INCLUDING DERIVATIVES (NOMINAL AMOUNTS) The interest flows in the table below are based, in case of variable-rate loans and borrowings, on the interest rates which the market is forecasting on the balance sheet date for the various future interest payment dates.

SEKm More than 3 More than More than Less than 3 months and up 1 years and up 3 years and up More than 5 2019 months to 1 year to 3 years to 5 years years Total Liabilities to credit institutions - 344 - 331 - 737 - 210 – - 1,662 Securities issued - 1,127 - 2,949 - 6,660 - 2,623 – - 13,359 Other liabilities, derivatives 2 6 20 - 45 – - 17 Other assets, derivatives 5 1 2 3 – 11 Subordinated debts - 1 - 5 - 14 - 16 - 433 - 469 Total - 1,465 - 3,278 - 7,389 - 2,891 - 433 - 15,456

SEKm More than 3 More than More than Less than 3 months and up 1 years and up 3 years and up More than 5 2018 months to 1 year to 3 years to 5 years years Total Liabilities to credit institutions - 121 - 586 - 1,042 - 282 - 97 - 2,128 Securities issued - 627 - 2,095 - 7,187 - 6,050 – - 15,959 Other liabilities, derivatives 2 5 12 - 45 – - 26 Other assets, derivatives 6 1 6 - – 13 Subordinated debts - 1 - 4 - 14 - 19 - 457 - 495 Total - 741 - 2,679 - 8,225 - 6,396 - 554 - 18,595

STRATEGIC RISKS REPUTATIONAL RISKS Volvofinans’ definition of strategic risk is the risk of loss due Reputational risk refers to the risk of loss due to a negative to changes in market conditions and unfavourable business perception of the bank by customers, counterparties, sharehold- decisions, inappropriate adaptation of decisions or a failure to ers, investors and regulators. The objective of risk management respond to changes in the market. The definition of strategic risk is to ensure that the bank is perceived as highly transparent by includes earnings, customer and competitor behaviour, changes all stakeholders and that these stakeholders have a good image to laws and regulations and economic conditions. of the bank. The primary objective of risk management is to ensure Reputational risks are the most difficult to protect yourself that the bank is aware of its strategic position and enable it against. The bank has taken measures to ensure that this risk to prepare itself at an early stage for a slowing market and is managed to the extent that it is possible. Risk identification increased or new competition. The bank works proactively to and self-assessment workshops with senior executives are held assess its strategic position and takes early action to prepare continuously. Over the course of the year (at least quarterly), the itself for changes in the market and competitive environment. bank meets with other banks and with investors to identify any Risk identification and self-assessment workshops with senior negative signals. executives are held continuously with the aim of identifying Press releases and information on the website are natural strategic risks. The bank also has well developed strategies for elements of the bank’s disclosure of information, and Volvofi- how the organisation should work with customers and handle nans strives to be seen as highly transparent by all stakeholders. the competition. Volvofinans has a department with responsibility for the bank’s PR and communication. The department is tasked with ensuring the communication plans are in place for identified reputation scenarios. Only the CEO may speak to the press. Volvofinans must maintain a high level of IT, system and card security. Volvofinans has internal procedures for the handling of com- plaints, such as complaints officers and clear reporting paths.

56 VOLVOFINANS BANK 2019 NOTES

CAPITAL ADEQUACY ANALYSIS The determination of the bank’s statutory capital requirement is made in accordance with the Swedish Special Supervision of Credit Institutions and Investment Firms Act (2014:968) and the EU’s Capital Requirements Regulation and Directive (CRD IV/CRR), which has been incorporated into Swedish law, with further definitions and detailed guidelines issued by the Swedish Financial Supervisory Authority. From 2019, the bank does not prepare a separate external risk and capital management report (Pillar 3 report); instead, the disclosures are presented in the annual report. The introduction of IFRS 9 has had only a marginal impact on the bank’s capital adequacy. The IRB deficit is impacted by a corresponding amount as the bank’s higher credit risk provision, in accordance with the section on changes in accounting policies. The bank has decided that it will not opt for Regulation (EU) 2017/2395 of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) No 575/2013 as regards transitional arrangements for mitigating the impact of the introduction of IFRS 9. The reason for this is that the impact on the bank’s capital adequacy is marginal. As far as the bank is concerned, the rules help to strengthen the bank’s resilience to financial losses and thus protect the bank’s customers. Under the rules, the bank’s capital base (eq- uity and any debentures raised, etc.) must comfortably cover the prescribed minimum capital requirement, which consists of the capital requirements for credit risks, market risks and operation- al risks, as well as the calculated capital requirement for further identified risks in the operations in accordance with the bank’s internal capital adequacy assessment process. The bank has an adopted plan for the size of its capital base over the next few years (in accordance with ICAAP and ILAAP), which is based on risk profile, identified risks with regard to probability and economic impact, stress tests and scenario analysis, expected expansion of lending and financing opportuni- ties, as well as new legislation, actions of competitors and other changes in external factors. The review of the long-term plan is an integral part of the bank’s internal capital adequacy assessment process. The plan is followed up continuously and an annual documented review is made to ensure that the risks have been duly taken into account and reflect the bank’s actual risk profile and capital needs. Any changes or additions to the policy/strategy docu- ment adopted by the Board are assessed against current and future capital requirements, as with important credit decisions and investments. There are no ongoing or anticipated material or legal im- pediments to the rapid transfer of funds from the capital base or repayment of liabilities between the parent company and subsidiaries. Statutory capital requirements are summarised as follows, with specifications in the following sections.

VOLVOFINANS BANK 2019 57 NOTES

CAPITAL BASE (Including the Board’s proposed appropriation of retained earnings)

31 Dec 2019 31 Dec 2018 Common Equity Tier 1 capital: Instruments and reserves Capital instruments and related share premium accounts 400,000 400,000 Undistributed earnings 111,411 92,090 Other reserves 3,671,456 3,285,979 Common Equity Tier 1 capital before regulatory adjustments 4,182,867 3,778,069

Common Equity Tier 1 capital: regulatory adjustments Intangible assets - 15,060 - 21,545 Negative amounts due to calculation of expected loss amounts - 178,017 - 177,315 Gains or losses on liabilities of the institution that are valued at fair value that result from changes in the own credit standing of the institution - 22 - 50 Total regulatory adjustments to Common Equity Tier 1 capital - 193,099 - 198,910 Common Equity Tier 1 capital 3,989,768 3,579,159

Tier 2 capital: instruments and provisions Capital instruments and related share premium accounts 400,000 400,000 Supplementary capital 400,000 400,000 Total capital (Common Equity Tier 1 capital + Tier 2 capital) 4,389,768 3,979,159 Total risk-weighted assets 20,617,467 19,816,517

58 VOLVOFINANS BANK 2019 NOTES

CAPITAL REQUIREMENT AND RISK-WEIGHTED EXPOSURE AMOUNT

31 Dec 2019 31 Dec 2018 Risk- Risk- weighted weighted Capital exposure Average risk Capital exposure Average risk Credit risk, standardised approach requirement amount weight requirement amount weight Exposures to central governments and central banks – – – – – – Exposures to local authorities and comparable associations as well as agencies – – – – – – Exposures to administrative bodies, non-com- mercial undertakings and religious associations 543 6,793 100.0% 424 5,300 100.0% Institutional exposures 21,784 272,299 20.0% 27,569 344,613 20.0% of which counterparty risk (768) (9,606) (–) (887) (11,092) (–) Corporate exposures 18,655 233,185 92.9% 15,550 194,375 94.2% Retail exposures 28,984 362,294 66.7% 28,472 355,895 66.5% Unsettled items 267 3,335 150.0% 1,011 12,633 150.0% Covered bonds 11,325 141,561 10.0% 11,454 143,171 10.0% Equity exposures 1,440 18,000 100.0% 2,442 30,520 100.0% Other items 1,859 23,233 100.0% 1,291 16,133 100.0% Total capital requirements for credit risks using the standardised approach 84,856 1,060,701 20.3% 88,211 1,102,641 20.7%

Credit risk using the IRB approach Corporate exposures 535,620 6,695,250 70.4% 495,965 6,199,557 71.6% Retail exposures 558,213 6,977,663 21.6% 556,739 6,959,233 21.4% Non-credit obligation asset exposures 322,735 4,034,183 100.0% 313,729 3,921,608 100.0% Total capital requirements for credit risks using the IRB approach 1,416,568 17,707,097 38.7% 1,366,432 17,080,398 37.9% Total 1,501,424 18,767,798 36.8% 1,454,643 18,183,039 36.1%

Operational risk using the Basic Indicator Approach 146,522 1,831,531 – 128,654 1,608,170 – Credit valuation adjustment (CVA) 1,451 18,138 – 2,025 25,308 – Total minimum capital requirement and risk-weighted exposure amount 1,649,397 20,617,467 – 1,585,322 19,816,517 –

The bank meets the minimum capital base requirement, which is a capital base of at least the total minimum capital requirement, and has a capital base which exceeds the initial capital (the capital that was required when the company received a licence to provide financing services).

CAPITAL ADEQUACY 31 Dec 2019 31 Dec 2018 Risk-weighted assets (REA) 20,617,467 19,816,517

Available capital as a percentage of REA Common Equity Tier 1 capital ratio, % * 19.35 18.06 Tier 1 ratio, % 21.29 20.08 Total capital ratio, % ** 21.29 20.08 Common Equity Tier 1 capital available to meet buffers 2,960,571 2,687,416

* Common Equity Tier 1 Capital in relation to risk-weighted exposure amount. ** Capital base in relation to risk-weighted exposure amount.

VOLVOFINANS BANK 2019 59 NOTES

CAPITAL AND BUFFER REQUIREMENTS

31 Dec 2019 31 Dec 2018 Common Equity Common Equity Total Tier 1 capital Tier 1 capital Total own funds Tier 1 capital Tier 1 capital capital base Per cent requirement requirement requirements requirement requirement requirement Minimum capital requirement 4.5 6.0 8.0 4.5 6.0 8.0 Capital conservation buffer 2.5 2.5 2.5 2.5 2.5 2.5 Countercyclical buffer 2.5 2.5 2.5 2.0 2.0 2.0 Total 9.5 11.0 13.0 9.0 10.5 12.5

Amount Minimum capital requirement 927,786 1,237,048 1,649,397 891,743 1,188,991 1,585,322 Capital conservation buffer 515,437 515,437 515,437 495,413 495,413 495,413 Countercyclical buffer 515,437 515,437 515,437 396,330 396,330 396,330 Total capital requirement 1,958,659 2,267,921 2,680,271 1,783,486 2,080,734 2,477,066

Capital requirement/ Of which CET1 31 Dec 2019 Capital requirement Total REA requirement/REA Credit risk 1,501,424 7.3% 4.1% Operational risk 146,522 0.7% 0.4% CVA risk 1,451 0.0% 0.0% Pillar 1 own funds requirements excluding buffer requirements 1,649,397 8.0% 4.5%

Concentration risk 294,797 1.4% 0.9% Strategic risk 82,470 0.4% 0.3% Interest rate risk 65,000 0.3% 0.2% Supplement for internally assessed Pillar 2 capital requirement 442,267 2.1% 1.4%

Capital conservation buffer 515,437 2.5% 2.5% Institution-specific countercyclical capital buffer 515,437 2.5% 2.5% Buffer requirements 1,030,874 5.0% 5.0% Capital requirements 3,122,538 15.1% 10.9% Capital base 4,389,768 20.8% 18.9% Capital surplus 1,267,230 5.7% 8.0%

Capital requirement/ Of which CET1 31 Dec 2018 Capital requirement Total REA requirement/REA Credit risk 1,454,643 7.0% 3.9% Operational risk 128,654 1.0% 0.6% CVA risk 2,025 0.0% 0.0% Pillar 1 own funds requirements excluding buffer requirements 1,585,322 8.0% 4.5%

Concentration risk 289,104 1.5% 1.0% Strategic risk 79,266 0.4% 0.3% Interest rate risk 65,000 0.3% 0.2% Supplement for internally assessed Pillar 2 capital requirement 433,370 2.2% 1.5%

Capital conservation buffer 495,413 2.5% 2.5% Institution-specific countercyclical capital buffer 396,330 2.0% 2.0% Buffer requirements 891,743 4.5% 4.5% Capital requirements - 2,910,435 14.7% 10.5% Capital base 3,979,159 20.1% 18.1% Capital surplus 1,068,724 5.4% 7.6%

The internal capital adequacy assessment process has resulted in an internal capital requirement of SEK 2,092 million (2,019) as at 31 December 2019. If the combined buffer requirement is included, the bank’s total capital requirement is SEK 3,123 million (2,910). The capital surplus, calculated on the basis of the internal capital requirement including buffer requirements, is thus SEK 1,267 million (1,069).

60 VOLVOFINANS BANK 2019 NOTES

LEVERAGE RATIO 31 Dec 2019 31 Dec 2018 Tier 1 capital 3,989,768 3,579,159 Total assets as per published financial statements 42,436,020 41,794,753 Adjustments for financial derivative instruments 48,054 55,509 Adjustment for off-balance sheet items (i.e. conversion to credit equivalents for off-balance sheet exposures) 1,318,266 1,563,865 Other adjustments - 193,099 - 198,911 Exposure measure 43,609,241 43,215,215 Leverage ratio, % 9.15 8.28

KEY COMPONENTS OF CAPITAL INSTRUMENTS Issuer Volvofinans Bank AB Volvofinans Bank AB Unique identifier (e.g. CUSIP, ISIN or Bloomberg identifier for private placement) N/A SE0011062744 Governing law(s) of the instruments Swedish law Swedish law

Legal treatment Transitional rules of the Capital Requirements Regulation Common Equity Tier 1 capital Supplementary capital Post-transitional rules of the Capital Requirements Regulation Common Equity Tier 1 capital Supplementary capital Eligible at solo/consolidated (sub-consolidated level)/solo and consolidated (sub-consolidated) level Solo Solo Instrument type (types to be specified by each jurisdiction) Share capital Debentures Amount recognised in regulatory capital as of most recent reporting date 400,000 400,000 Nominal amount of instrument 400,000 400,000 Issue price N/A 100% Redemption price N/A 100% Accounting classification Equity Subordinated debt Original date of issuance 1959 28 Mar 2018 Perpetual or dated Perpetual Dated Original maturity date N/A 11 Apr 2028

Issuer call subject to prior supervisory approval N/A Yes Optional call date, contingent call dates and redemption amount N/A Optional call date, whole amount Subsequent call dates, if applicable N/A N/A

Coupons/dividends Fixed or floating dividend/coupon N/A Floating coupon Coupon rate or any related index N/A 3-month STIBOR + 1.45 Existence of dividend stopper N/A No Fully discretionary, partially discretionary or mandatory (in terms of timing) N/A Mandatory Fully discretionary, partially discretionary or mandatory (in terms of amount) N/A Mandatory Existence of step up or other incentive to redeem N/A No

Non-cumulative or cumulative Non-cumulative Non-cumulative Convertible or non-convertible Non-convertible Non-convertible Write-down features No No Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) Common Equity Tier 1 capital Subordinated Non-compliant transitioned features No No

VOLVOFINANS BANK 2019 61 NOTES

CAPITAL MANAGEMENT ensuring that the bank has appropriate governing and control The bank’s strategies and methods for assessing and maintaining functions and risk management systems in place. The internal its own funds requirements are determined by its risk manage- capital adequacy assessment process is performed at least ment. The bank’s risk management is designed to identify and once a year. analyse the risks which arise in the course of its operations, de- The ICAAP process is based on the risk identification and fine appropriate limits for such risks and ensure that the required self-assessment workshops that are held with key individuals controls have been introduced. Risks are monitored and controls in the company. The risks are quantified using the method are performed on a regular basis to ensure that limits are not which the bank deems to be appropriate for each type of risk. exceeded. The bank has an integrated function for independent An assessment is made for each type of risk with regard to risk control that reports directly to the CEO and whose duty it is whether additional capital is required to cover the specific risk to analyse changes in risks and propose amendments to govern- type. The assessment is based on Pillar 1 capital requirements ance documents and processes where required. and additional capital is added where necessary for other risks. To assess whether the internal capital is adequate to serve The internal capital adequacy assessment is then stress-tested as a basis for current and future activities and to ensure that to ensure that the bank’s capital level can be maintained also in the capital is of the right size and composition, the bank has stressed scenarios. The stressed scenarios are forward-looking its own internal capital adequacy assessment process. The and based on a three-year business plan. The Board of Directors process is a tool which ensures that the bank in a clear and and Management consider that the Bank's risk management correct manner identifies, measures and manages all risks to is satisfactory and that the Bank's risk management system is which it is exposed and makes an assessment of its internal appropriate and consistent with its existing strategies. capital adequacy requirement in relation thereto. This includes

62 VOLVOFINANS BANK 2019 VOLVOFINANS BANK 2019 63 NOTES

NOTE 3. ACCOUNTING POLICIES 3.1 Measurement bases for the preparation of the bank’s financial statements. . . . . page 65 3.2 Functional currency and reporting currency 3.3 Judgements and estimates in the financial statements 3.4 Changes in accounting policies 3.4.1 Application of new IFRS and future regulations 3.5 Operating segment...... page 66 3.6 Subsidiaries and associates 3.7 Foreign currency 3.8 Interest income and expenses and dividend 3.9 Commission and fee income 3.10 Commissions and fees earned when a specific service is performed 3.11 Commissions and fees that are included in the effective interest rate ...... page 67 3.12 Classification of leases and recognition of lease income 3.13 Commission expense ...... page 68 3.14 Net income/expense from financial transactions 3.15 General administrative expenses 3.16 Taxes 3.17 Financial instruments 3.17.1 Recognition and derecognition 3.17.2 Classification and measurement ...... page 69 3.18 Derivatives and hedge accounting 3.19 Credit losses and impairment of financial instruments...... page 70 3.19.1 Impairment testing for financial assets 3.19.1.1 Recognition of expected loan losses – loans and advances to customers and loan commitments issued 3.19.1.2 Recognition of expected loan losses – debt securities...... page 72 3.19.1.3 Recognition of expected loan losses – loans and advances to credit institutions 3.19.1.4 Recognition of expected loan losses – lease receivables 3.19.1.5 Presentation and recognition of credit losses in the balance sheet and income statement 3.19.1.6 Recognition of actual credit losses 3.20 Property, plant and equipment...... page 73 3.20.1 Owned assets 3.20.2 Leased assets for which the bank is a lessor 3.20.3 Subsequent expenditures 3.20.4 Basis of depreciation 3.21 Intangible assets 3.21.1 Development 3.21.2 Licences 3.21.3 Subsequent expenditures 3.21.4 Basis of amortisation 3.22 Impairment of property, plant and equipment and intangible assets and participations in subsidiaries and associated companies 3.22.1 Impairment testing 3.22.2 Reversal of impairment losses...... page 74 3.23 Liabilities and equity 3.23.1 Share capital 3.23.1.1 Dividends 3.23.1.2 Fund for development expenditure 3.23.2 Post-employment benefits 3.23.2.1 Retirement benefits through insurance 3.23.2.2 Termination benefits 3.23.2.3 Short-term employee benefits 3.24 Group contributions and Appropriations

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The bank’s annual report has been prepared in accordance with the Areas where uncertainty about estimates may exist are assump- Annual Accounts for Credit Institutions and Investment Firms Act tions about impairment for credit losses, impairment of lease (1995:1559), the Regulations and General Recommendations of assets and assessment of residual values. the Swedish Financial Supervisory Authority on Annual Accounts Estimates and assumptions are reviewed regularly. of Credit Institutions and Investment Firms (FFFS 2008:25) in Changes in estimates are recognised in the period in which the accordance with the amending regulation in FFFS 2009:11 and change is made if the change affects only that period, or in the Recommendation RFR 2 Financial Reporting for Legal Entities of period in which the change is made and future periods if the the Swedish Financial Reporting Board. The bank applies so-called change affects both the current and future periods. IFRS with certain limitations contained in Swedish statutes, which refers to the standards that have been adopted for application 3.4 CHANGES IN ACCOUNTING POLICIES subject to the limitations contained in RFR 2 and FFFS 2008:25. Amendments to IFRS during 2019 had no material impact on This means that all IFRS and interpretations adopted by the EU the bank’s financial statements. have been applied insofar as this is possible subject to the Swedish Annual Accounts Act and with regard to the relationship between 3.4.1 Application of new IFRS and future regulations accounting and taxation. The annual report was approved for pub- lication by the Board of Directors on 29 March 2020. The income IFRS 16 LEASES statement and balance sheet will be submitted for adoption at the IFRS 16 is a new standard for financial reporting of leases that Annual General Meeting on 11 June 2020. entered into force on 1 January 2019. IFRS 16 introduces a uni- Unless otherwise indicated, the accounting policies de- form lease accounting model for lessees. A lessee reports a right of scribed below have been applied consistently for all periods use asset, which represents an entitlement to use the underlying presented in the financial statements. asset, and a lease liability, which represents an obligation to make lease payments. The reporting for lessors is similar to the previous 3.1 MEASUREMENT BASES FOR THE PREPARATION standard, i.e. lessors continue to classify leases as finance or OF THE BANK’S FINANCIAL STATEMENTS operating leases. The standard primarily has the greatest impact Assets and liabilities are stated at historical cost. Financial assets on lessees and their reporting of lease assets. As the lessor, the and liabilities are recognised at amortised cost, with the exception bank continues to report the lease assets as operating leases, and of certain financial assets and liabilities that are measured at fair the assets are included in the balance sheet. The bank applies the value (see Note 36) or when fair value hedge accounting is applied. exemption rule in RFR 2 and thus recognises all leases as operat- ing leases, even in cases where the bank is the lessee. Refer also 3.2 FUNCTIONAL CURRENCY AND REPORTING CURRENCY to Notes 6, 13 and 38. The introduction has not had a significant The bank’s functional currency is the Swedish krona and the finan- effect on the bank’s financial position, performance or cash flow. cial statements are presented in Swedish kronor. Unless other­ wise indicated, all figures are rounded to the nearest thousand. THE IBOR REFORM In September 2019, IASB published amendments to IAS 39, 3.3 JUDGEMENTS AND ESTIMATES IFRS 9 and IFRS 7 in response to the ongoing reference rate IN THE FINANCIAL STATEMENTS (IBOR) reforms. The amendments are mandatory and must be Preparing financial statements in accordance with IFRS requires applied from 1 January 2020. The amendments relate mainly to that the bank’s management make judgements and estimates as hedge accounting requirements and provide relief for maintain- well as assumptions which affect the application of the account- ing hedging relationships despite potential uncertainties result- ing policies and the recognised amounts of assets, liabilities, ing from the IBOR reform. The reform also introduces further income and expenses. The estimates and assumptions applied disclosure requirements for hedging relationships affected by are based on historical experience and other factors which are the uncertainty of the ongoing reference rate reforms: deemed reasonable under current circumstances. The results of • Significant exposure to reference rates and its scope these estimates and assumptions are then used to determine car- • How the bank manages the transition to the new rying amounts of​​ assets and liabilities that are not readily apparent alternative reference rates. from other sources. Actual results may differ from these estimates • Significant assumptions or judgments used by the bank and judgements. The bank has mainly made the following critical in applying the amendments judgements in applying significant accounting policies: • Nominal amount of hedging relationships to which relief • Choice of method for calculating expected loan losses provisions are applied • Whether the bank has assumed significant risks and For derivatives to which hedge accounting is not applied, the bank benefits from the seller on acquisition of receivables and has exposure to STIBOR and NIBOR. For derivatives to which agreements hedge accounting is applied and for all other financial instruments, • Impairment testing of lease assets where there is a risk the bank only has exposure to STIBOR. For further information that residual values will decline on the derivatives, see Note 27. As the bank does not use cash • Assessment of the bank’s business model for the holding flow hedges, no effects should arise in the accounts until possibly of securities in the liquidity portfolio after the IBOR reforms have been fully implemented and have had

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an impact on the bank’s derivatives contracts and other financial Interest income and interest expense presented in the income instruments linked to reference rates. statement consist of: • Interest on financial assets and liabilities measured at 3.5 OPERATING SEGMENT amortised cost using the effective interest method. An operating segment is a component of the bank that engages • Interest on derivatives for which hedge accounting is not in business from which it may earn revenues and incur expenses, applied is measured at fair value through profit or loss. for which separate financial information is available and whose • Interest paid and accrued on derivatives that are hedging results are regularly reviewed by the bank’s management for the instrument and for which hedge accounting is applied. purpose of evaluating the results and allocating resources to the • Interest on financial assets at fair value. operating segment. See Note 4 for further segment information. Negative interest income is reported as interest expense and 3.6 SUBSIDIARIES AND ASSOCIATES positive interest expense is reported as interest income. The bank accounts for interests in subsidiaries and associates Dividends from shares and interests are reported in the item using the cost method. Profit or loss from associated companies “Dividends Received” when the right to receive payment is is reported under other operating income. determined. Interest paid and accrued is recognised as interest income 3.7 FOREIGN CURRENCY for interest rate derivatives which hedge financial assets The bank’s functional currency is the Swedish krona. Trans­ and as a part of interest expense for interest rate derivatives actions in foreign currency are translated to the functional which hedge financial liabilities. Unrealised changes in value of currency using the exchange rate at the transaction date. derivatives are recognised in the item “Net income/expense from Monetary assets and liabilities in foreign currency are trans- financial transactions”, see Note 10. lated into the functional currency at the closing rate. Foreign exchange differences arising on translation are recognised in 3.9 COMMISSION AND FEE INCOME the income statement. Non-monetary assets and liabilities The bank does not provide any combined services in which the stated at historical cost are translated using the exchange rate period for meeting performance commitments differs. at the transaction date. Non-monetary assets and liabilities at • Commissions and fees that are included in the effective fair value are translated to the functional currency at the rate interest rate applying at the time of measurement at fair value. Commissions and fees that are an integral part of the effective interest rate are recognised for all financial instruments meas- 3.8 INTEREST INCOME AND EXPENSES AND DIVIDEND ured at amortised cost as part of the cost of the related asset, Interest income on receivables and interest expense on liabilities which is allocated to accounting periods using the effective are calculated using the effective interest method. The effective interest method and is thus accounted for as interest income interest rate is the interest rate at which the present value of and not as commission income. These commissions and fees all estimated future incoming and outgoing payments during comprise mainly fees for the provision of credit facilities or other the expected fixed-rate term is equal to the recognised value of types of loan commitments in cases where it is likely that the the receivable or liability. Interest income and interest expense credit facility will be drawn. includes, where applicable, accrued fees received that are Commissions and fees accrued as performance included in the effective interest rate, transaction costs and any commitments are met discounts, premiums and other differences between the original Commissions and fees relating to financial services performed value of the claim or liability and the amount settled at maturity. on an ongoing basis, and where the services (performance com- Interest income from financial assets valued at amortised mitments) are achieved gradually, are reported and allocated as cost are recognised on an “of which” line. income over the period during which the service is provided and Interest income is recognised on the basis of the net recog- the performance commitment met. These services and fees relate nised value of the assets in stage 3 and the gross recognised primarily to fees for credit facilities or other types of loan promise value (i.e. excluding loss provisions) for assets in stages 1–2. where it is not likely that the facility will be used, as well as to fees and commissions for the provision of financial guarantees.

3.10 COMMISSIONS AND FEES EARNED WHEN A SPECIFIC SERVICE IS PERFORMED These commissions and fees are generally related to a specific transaction and are recognised as income immediately. These fees and commissions include various types of notice fees, and debit and credit card fees.

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3.11 COMMISSIONS AND FEES THAT ARE INCLUDED Net lease income (see also Note 6) from finance leases that are IN THE EFFECTIVE INTEREST RATE accounted for as operating leases includes scheduled deprecia- Commissions and fees that are an integral part of the effective tion that is allocated over the term of the lease and recognised interest rate are recognised for all financial instruments at using the annuity method (see also basis of depreciation). This amortised cost as part of the cost of the related liability, which means that these contracts give rise to a higher net income at is allocated to accounting periods using the effective interest the beginning of the contract term and a lower net income at the method and is thus accounted for as interest expense and not end of the contract term. Net lease income from leases which as commission expense. These commissions and fees, which constitute operating leases based on their economic substance mainly comprise loan arrangement fees and fees for the provi- includes scheduled depreciation that is allocated over the term sion of credit facilities or other types of loan commitments in of the lease and recognised on a straight-line basis (see also ba- cases where it is likely that the credit facility will be drawn. sis of depreciation). This means that net income remains constant over the term of the contract. 3.12 CLASSIFICATION OF LEASES AND RECOGNITION For all of the bank’s lease agreements with customers, the OF LEASE INCOME customer has a contractual right to early settlement. If the In accordance with RFR 2, finance leases are accounted for contractual rate of interest is higher than the current interest according to the rules which apply for operating leases, including rate, the customer must then pay an amount to cover the the disclosure requirements. All leases are thus accounted for difference. Because of this, the agreements are cancellable. in accordance with the rules for operating leases, which means Monthly or quarterly interest that has already been charged, that assets for which a lease has been concluded (irrespective however, is not cancellable. See Note 32. of whether the contracts are finance or operating leases) are recognised in the same line of the balance sheet as for the corresponding assets owned by the bank. In the “Lease income” item in the balance sheet lease income is recognised on a gross basis, i.e. before scheduled depreciation.

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3.13 COMMISSION EXPENSE The measurement of deferred tax is based on how the under­ This item comprises fees for services received to the extent lying assets or liabilities are expected to be realised or settled. that they are not classified as interest, e.g. clearing and bank Deferred tax is calculated based on the tax rates and tax rules giro expenses, custodial fees and fees paid to Upplysnings­ that have been enacted or substantively enacted at the balance centralen, a business and credit reference agency. Transaction sheet date. costs that are taken into account in calculating the effective Deferred tax assets relating to temporary differences and tax interest rate are not recognised here. losses are recognised only to the extent that it is likely that it will be possible to use them. The measurement of deferred tax 3.14 NET INCOME/EXPENSE FROM assets is reduced when it is no longer expected that it will be FINANCIAL TRANSACTIONS possible to use the assets. Tax on profit for the year includes The item “Net income/expense from financial transactions” current tax, deferred tax and tax in respect of prior years. includes realised and unrealised changes in value arising from financial transactions. 3.17 FINANCIAL INSTRUMENTS Net income/expense from financial transactions comprises: Financial instruments recognised in the balance sheet include, • Capital gains and losses from sales of financial assets and on the asset side, chargeable treasury bills, loans and advances liabilities at amortised cost. to credit institutions, loans and advances to customers, bonds • Realised and unrealised changes in the value of derivatives and other debt securities, and other assets and accrued income. that are financial hedging instruments, but where hedge Other assets include trade receivables and derivatives with accounting is not applied. positive market values. Accrued income consists of accrued • Unrealised changes in fair value of hedged item attributa- interest income. Financial instruments on the debt side include ble to the hedged risk in a fair value hedge. liabilities to credit institutions, retail borrowings, securities • Unrealised changes in fair value of derivatives for which fair issued, subordinated debts and other liabilities and accrued value hedge accounting is applied. expenses. Other liabilities include trade payables and derivatives • Unrealised changes in fair value of hedged item attributa- with negative market values. Accrued expenses refer to accrued ble to the hedged risk in a fair value hedge. interest expenses. • Exchange rate changes. 3.17.1 Recognition and derecognition 3.15 GENERAL ADMINISTRATIVE EXPENSES A financial asset or financial liability is recognised in the balance General administrative expenses comprise staff costs, including sheet when the bank becomes a party to the contractual terms salaries and fees, bonuses and commissions, retirement benefit of the instrument. costs, payroll tax and other social security contributions. The A financial asset is derecognised when the rights under the item also includes rental, audit, training, IT, telecom, travel and contract are realised, expire or when the bank loses control entertainment expenses. over them. The same applies to a portion of a financial asset. A financial liability is derecognised when the obligation under 3.16 TAXES the contract is discharged or otherwise extinguished. The same Income taxes consist of current tax and deferred tax. Income applies to a portion of a financial liability. taxes are recognised in the income statement, except when the A financial asset and financial liability are netted in the underlying transaction is recognised directly in equity, in which balance sheet only when there exists a legal right to offset the case the associated tax effect is also recognised in equity. amounts and there is an intention to settle the items on a net Current tax is tax that is payable or receivable in respect basis or to simultaneously realise the asset and settle the liability. of the current year at tax rates that have been enacted or sub- Acquisitions and sales of financial assets are recognised stantively enacted at the balance sheet date. This also includes at the transaction date, which is the date on which the bank adjustments of current tax attributable to previous periods. undertakes to acquire or sell the asset. Loan commitments Deferred tax is calculated using the balance sheet liability are not recognised in the balance sheet. Loans are recog- method for all temporary differences between the carrying nised in the balance sheet upon payment of the loan amount amounts and tax bases of assets and liabilities. Temporary to the borrower. An impairment loss on a loan commitment is differences are not taken into account for differences arising on recognised if the commitment is irrevocable and is made to a initial recognition of goodwill. or on initial recognition of assets borrower for which impairment has been identified even before and liabilities that are not business combinations, which at the the loan is paid out or when the lending rate does not cover the time of the transaction do not affect either the accounting or tax bank’s borrowing costs for funding the loan. profit. Nor are temporary differences attributable to interests in associates that are not expected to be reversed in the foresee­ able future taken into account.

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3.17.2 Classification and measurement 3.18 DERIVATIVES AND HEDGE ACCOUNTING Financial instruments are recognised initially at the fair value Derivatives are used to hedge the risks of financial interest of the instrument plus transaction costs, except for derivatives and foreign exchange risks to which the bank is exposed. The classified as financial assets or liabilities at fair value, which are derivatives used by the bank are interest rate swaps to manage recognised at fair value less transaction costs. interest rates and interest exchange rate swaps to hedge the All derivatives are valued initially and continuously at fair value bank’s exposure to currency fluctuations. See the sections in the balance sheet. If hedge accounting is not applied, the Currency risk and Market risk. changes in value are recognised in the income statement and The bank has chosen to continue applying the hedge ac- derivatives are categorised as valued at fair value, even in cases counting rules in IAS 39. Hedging instruments consist of interest where they financially hedge risk but where hedge accounting rate swaps for hedging interest rate risk. The hedged items is not applied. If hedge accounting is applied, the value changes consist of fixed-rate borrowing, and the hedged risk is the risk of are reported on the derivative and the hedged item in a manner change in the fair value as a result of interest rate fluctuations. described in the “Derivatives and Hedge accounting” section. The bank only applies hedge accounting for those economic hedge relationships in which the impact on earnings would, Measurement of financial instruments at amortised cost in the view of the bank, become too misleading unless hedge The bank’s principles for the classification and measurement accounting is applied. of financial assets are based on an assessment of both the For other economic hedges in which the impact on earnings bank’s business model for the management of financial assets of not applying hedge accounting is deemed to be limited, and the characteristics of the contractual cash flows from the hedge accounting is not applied in view of the additional admin- financial asset. istrative work involved in using hedge accounting. Apart from derivatives, all financial assets are measured at am- The bank has a non-dynamic hedging strategy. ortised cost. It is considered that the assets are held in the context When a hedging instrument is used to hedge a fair value, the of a business model whose objective is to hold financial assets derivative is recognised at fair value in the balance sheet and the for the purpose of collecting contractual cash flows and that the hedged asset/liability is also recognised at fair value in respect of contractual provisions of those assets give rise, at certain times, the hedged risk. The change in value of the derivative is recog- to cash flows that are only payments of principal and interest nised in the income statement together with the change in value on the amount of the outstanding principal. The amortised cost of the hedged item in the income statement under the item Net is determined on the basis of the effective interest calculated at income/expense from financial items at fair value. Unrealised the time of acquisition. Provisions for expected credit losses are changes in value of the hedging instruments are recorded in made for assets in this measurement category. the Net income/expense of financial transactions and interest Apart from derivatives, all financial liabilities are valued at coupons (both accrued and paid) among interest income. The amortised cost. The categories to which the company’s financial source of inefficiencies is any difference in the discount curves assets and liabilities have been classified are described in between the hedging instrument and the hedged item. See Note 36. Note 27. To meet the requirements for hedge accounting contained Measurement of financial instruments at fair value in IAS 39, there must be an explicit link to the hedged item. The Fair values for financial assets and liabilities traded on an hedge must also effectively protect against the intended risk active market are based on quoted prices. The company uses in the hedged item, hedging documentation must have been other measurement techniques for other financial instruments. prepared and the effectiveness of the hedge must be reliably The bank uses observable data as far as possible. Financial measurable. Hedge accounting may only be applied if the hedge instruments where trade is not frequent and fair value is relationship is expected to be highly effective and can subse- therefore less objective to a varying extent require the bank quently be shown to have had an effectiveness of 80–125%. If to make assessments depending on liquidity, concentrations, the criteria for hedge accounting are no longer met, derivatives uncertainties regarding market factors, price assumptions and are stated at fair value and the change in value is recognised other risks affecting a specific instrument. For a description through profit or loss. Hedge accounting ceases if the hedging of the methods applied in fair value measurement of financial instrument is sold, or if the hedge relationship no longer meets instruments, see Note 36. the criteria or ceases. When the hedge relationship ceases, accumulated gains and losses that have adjusted the hedged item are recognised through profit or loss and allocated over a period of time until the expected maturity of the hedged item. If the hedged item is sold and realised the change in value is recognised in the income statement immediately.

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3.19 CREDIT LOSSES AND IMPAIRMENT OF For financial instruments under stage 1, the provision corresponds FINANCIAL INSTRUMENTS to the credit loss expected to be incurred within 12 months, The bank’s credit portfolio consists mainly of vehicle finance. Total while for the financial instruments in stage 2, where a significant lending in respect of vehicle finance mainly comprises loans and increase in credit risk has been identified, as well as doubtful leases that have been transferred or pledged to the bank by the receivables in stage 3, the provision corresponds to the expected Volvo dealer, with collateral in the form of vehicles through right credit losses for the remaining term of the financial instrument. of repossession or ownership rights. Under a recourse agree- The expected credit losses for the remaining term of the financial ment with the dealer, the dealer bears the ultimate credit risk for instrument represent losses from all default incidents possi- these credit contracts if required by the bank. ble during the remaining term of the financial instrument. The A loss is incurred by the bank as a result of these contracts in expected credit losses anticipated to occur within 12 months the following circumstances: represent the part of the expected credit losses for the remaining 1. The customer suspends payments. term of the financial instruments that are due to default incidents 2. The dealer lacks the ability to pay. within 12 months of the reporting date. 3. The market value of the repossessed vehicle is less than the remaining debt under the contract. 3.19.1.1 Recognition of expected credit losses – loans and advances to customers and loan commitments issued In addition to vehicle financing, the bank’s lending consists of The bank’s loans and advances to customers consist mainly of loans and advances to customers in the form of card credits card credits and vehicle loans reported at amortised cost. and other loans. Loans and advances to credit institutions with bank deposits and investments in debt securities in the form of Determination of a significant increase in credit risk housing and municipal bonds and commercial papers. On each A credit that has been the subject of a significant increase in reporting occasion, the bank considers whether the objective credit risk is no longer included in stage 1 but rather in stage evidence indicating a receivable requires an impairment. 2 (provided that it is not credit-impaired). The bank considers whether a significant increase has occurred in credit risk by using 3.19.1 Impairment of financial assets a combination of individual and collective information, and will The accounting policies mean that expected credit losses are reflect the increasing credit risk at individual instrument level. The reported for loans and advances to customers and other items quantitative method used to assess increased credit risk consists on the balance sheet that are recorded at amortised cost. In ad- of a forward-looking estimate of each individual risk of exposure dition, loss provisions on off-balance sheet exposures submitted to default. The method is based on the bank’s system for classify- loan commitments are also recognised, e.g. unused card credits. ing credit risk. The scale of rating classes goes from 1 (indicating In the initial accounts, a loss provision is reported based on what the best risk class) to 8 (indicating the worst risk class). Depend- can be statistically expected for the next 12 months (stage 1). ing on the initial rating of the loan, a certain number of stages on Where a significant increase in credit risk has occurred, the loss this rating scale are required in the direction of a poorer rating provision is instead calculated for the entire remaining expected in order for the credit risk to be considered to have increased term (stage 2 or, if the exposure is considered as a credit impair- significantly. The worse the initial rating, the fewer stages the ment, stage 3). rating needs to deteriorate before a significant increase in credit The provision for credit losses is measured according to a risk is considered to have arisen. When the borrower has overdue model of expected credit losses and reflects a probability-weighted unpaid amounts older than 30 days, these exposures are always amount determined by evaluating a range of possible outcomes, considered exposures with a significant increase in credit risk. If, while taking into account reasonable and verifiable information ac- at a later stage, the internal rating has improved to a sufficient cessible on the reporting date. Credit loss provisions are measured extent, such that a significant increase in credit risk is no longer on the basis of whether or not a significant increase has occurred in considered to apply when compared with the initial recognition, credit risk compared with the initial recognition of an instrument. the credit will be reverted from stage 2 to stage 1. • Stage 1 covers financial instruments where no significant increase in credit risk has occurred since the initial recog- Credit-impaired loans nition and the counterparty is covered by the bank’s policy As in accordance with previous principles, loss provisions will be for low credit risk at the time of reporting. recognised for the remaining term of credit-impaired exposures • Stage 2 covers financial instruments where a signifi- (previously termed doubtful loans) once one or more events that cant increase in credit risk has occurred since the initial have a negative impact on estimated future cash flow for the recognition but where, at the time of reporting, there is no financial asset have occurred (stage 3). A loan is considered to objective evidence that the receivable is doubtful. be credit-impaired using the same criteria as those used under • Stage 3 covers financial instruments where objective evi- previous principles for the definition of a doubtful loan, i.e. where dence has been identified that the receivable is doubtful. payments are more than 90 days late or there is other evidence in the form of observable information of the following events:

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1. Significant financial difficulty of the debtor. limit. The LGD corresponds to the expected credit loss on a 2. A default or delinquency in interest or principal payments, defaulted credit exposure, taking into account the characteris- or other breach of contract. tics of the counterparty and the product type. Expected credit 3. The granting by the lender, for economic or legal reasons losses are determined by calculating the PD, LGD and EAD for relating to the borrower’s financial difficulty, of a conces- each future month up to the end of the expected term of a credit sion that the lender would not otherwise consider. exposure. These three parameters are multiplied and adjusted by 4. A growing likelihood that the borrower will enter bankruptcy the probability of survival or the likelihood that the credit exposure or other financial reorganisation. has not been prepaid or defaulted for a previous month. In this 5. Observable data indicating that there is a measurable de- way, the monthly expected credit losses are calculated, which crease in the estimated future cash flows from a group of are then discounted back to the reporting date with the original financial assets since the initial recognition of those assets, effective interest rate and summed up. A summary of the monthly although the decrease cannot yet be identified with the expected credit losses up to the end of the expected term gives individual financial assets in the group. the expected credit losses for the remaining term of the asset, and the sum of the credit losses expected to occur within 12 months Concessions granted by the bank due to a borrower’s financial gives the expected credit losses for the next 12 months. difficulty can also constitute objective evidence that the loan is When calculating the expected credit losses, the bank takes impaired. into account at least three scenarios (a base scenario, a positive If a previous loan that has been deemed credit-impaired no scenario and a negative scenario) with relevant macroeconomic longer is deemed so, a transfer will be made either to stage 2 variables such as the National Institute of Economic Research (if there is a significant increase in credit risk compared with the forecasts of the repo rate. The risk parameters used to calculate time at which the loan was granted) or to stage 1. expected credit losses incorporate the effects of macroeconomic forecasts. Each macroeconomic scenario is assigned a proba- Measurement of expected credit losses bility and the expected credit losses are obtained as a proba- Expected credit losses are calculated for each individual credit bility-weighted average of the expected credit losses for each exposure as the discounted product of the probability of default scenario. Where the impact of relevant factors is not captured by (PD), credit exposure in the event of default (EAD) and loss in risk models, the bank uses expert adjustments. the event of default (LGD). The term of an instrument is relevant both to the assessment The bank’s definition of default is close to the regulatory defini- of a significantly increased credit risk, which takes into account tion of default as it is used in the event of credit risk management. changes in the probability of default for the remaining term, and This means that an exposure to a specified counterparty should the measurement of expected credit losses for the remaining be regarded as defaulted if any of the following criteria are met: term of the asset. Generally, the expected term is limited to the 1. Volvofinans considers it likely that the counterparty will maximum contractual period during which the bank is exposed not be able to meet its obligations to the institution unless to a credit risk. All contractual terms are taken into account the institution realises possible collateral or takes similar when determining the expected term, including repayment, measures. extension and transfer options that are binding on the bank. 2. The counterparty is more than 90 days late with a pay- The only exception to this general principle applies to certain ment of anything other than a trivial amount. revolving credits, such as credit cards, where the expected term is estimated based on the period in which the bank is exposed PD corresponds to the probability of a borrower defaulting at a to credit risk and where credit losses cannot be mitigated by given point during the remaining term of the financial asset. To risk management measures. This so-called behavioural term is help in assessing the probability of default, the bank has created a determined using the specific historical data and extends up to number of different PD models based on the fact that the bank's 2 years. portfolio contains a number of different business areas, different The bank assesses and calculates loss provisions for signifi- types of counterparties, different products, etc. For commitments cant doubtful credit exposures individually, without using input within the balance sheet, the EAD is, in principle, the gross value data from models. Provisions for credit losses for these credit of the exposure without regard to provisions. For off-balance exposures are determined by discounting expected cash flows sheet commitments, the EAD is calculated by multiplying the and taking into account at least two possible outcomes that take unused amount that the counterparty, under the terms of the into account both macroeconomic and non-macroeconomic contract, is able to use by a conversion factor (CF). The CF is the (borrower-specific) scenarios. measure of the proportion of the unused limit expected to be used in the event of default. The EAD thus becomes the sum of the current commitment and expected utilisation of the remaining

VOLVOFINANS BANK 2019 71 NOTES

Modifications has assessed that the assets have a very low risk of default; there When a loan is modified but not removed from the balance is therefore no impairment for expected credit losses for loans sheet, an assessment of significant increases in credit risk shall and advances to credit institutions. be made in relation to the initial credit risk for impairment pur- poses. Modifications do not automatically result in a reduction 3.19.1.4 Recognition of expected loan losses – in credit risk and all qualitative and quantitative indicators will lease receivables continue to be assessed. Furthermore, a modification gain or The bank also recognises impairments for lease assets, which loss is recognised in the income statement on the credit loss line in the balance sheet are recognised as property, plant and and refers to the difference in the present value of the contrac- equipment. The bank’s basic methodology for calculating loss pro- tual cash flows discounted by the original effective interest rate. visions for lease assets is the same as for loans and advances to When a loan is modified and removed from the balance sheet, customers. For the PD parameter, the data source is the internal the date on which the modification was made is deemed to source systems, where the variables included in the calculation be the initial recognition of the new loan in order to assess the differ between card credits and vehicle financing. In the same way impairment requirement, including the assessment of significant as for card credits, the LGD factor is based on the bank’s internal increases in credit risk. historical data. As at 31 December 2019, the bank had no loans with a significant modification. Hence, the bank reports no impair- 3.19.1.5 Presentation and recognition of credit losses ments due to modifications in the note Loans and advances to in the balance sheet and income statement customers. For financial assets valued at amortised cost, provisions for credit losses are presented in the balance sheet as a decrease 3.19.1.2 Recognition of expected credit losses – in the gross carrying amount of the asset. Loan commitments debt securities are an off-balance sheet component. In cases where a financial The bank also recognises loss provisions on debt securities that instrument consists of two components, one loan and one loan are recognised at amortised cost. The bank’s basic methodology commitment, such as a revolving overdraft facility, the bank for calculating loss provisions for debt securities is the same as reports the credit loss provision for the loan and loan commit- for loans and advances to customers. However, the sources of ment combined. information on the parameters used (PD, LGD and EAD) differ. In Changes in loss provisions are recognised in the income state- the case of PD, it is derived from the external rating of the securi- ment on the Net credit losses line, except the lease receivables that ties and the externally available information from rating agencies are recognised under operating expenses and impairments on lease Moody’s and Standard and Poor’s about the risk of default that assets. this rating is associated with. The bank has chosen to determine A write-off reduces the gross carrying amount of the financial the LGD factor based on statistics from Moody’s, where the factor asset. Credit losses and write-offs are presented in the income is the average of the last five years’ reported loss rates. In the initial statement as credit losses. Write-offs are made when the accounts, the statistically expected loss is reported over the next 12 amount of the loss is considered finally determined and are months (stage 1). A significant increase in credit risk is subsequent- reported under credit losses; they represent the amount prior to ly considered to have taken place when there has been a deteriora- the assumption of the previously made provision. Repayments of tion in the external rating and credit losses are then recognised for write-offs as well as recoveries of provisions recognised in credit the remaining term (stage 2). A deterioration in the external rating losses. is considered to take place when the initial rating is changed from investment grade to non-investment grade. If, at a later stage, the 3.19.1.6 Recognition of actual credit losses external rating has improved to a sufficient extent, such that a sig- Loans receivable which have been classified as credit-impaired nificant increase in credit risk is no longer considered to apply when are written off from the balance sheet when the credit loss is compared with the initial recognition, the security will be reverted considered an actual credit loss, which occurs when the admin- to stage 1. The bank considers that financial assets on instruments istrator has submitted an estimate of the distribution of assets in with counterparties that are States and financial institutions and a bankruptcy, a composition with creditors has been agreed or that have a low credit risk on the reporting date (with investment the debt has otherwise been remitted, or if the loan is sold to an grade rating or better) are not considered to have been subject to a external party. significantly increased credit risk. The bank uses the same criteria After being written off, loans are no longer recognised in the to assess whether a debt security is credit-impaired as that used for balance sheet. Recovery of previously written off loans is recog- loans and advances to customers. nised as a reduction of credit losses in the net credit losses line in the income statement. 3.19.1.3 Recognition of expected credit losses – The bank has no financial assets that were written off during loans and advances to credit institutions the reporting period and are subject to compliance measures. The bank’s loans and advances to credit institutions are also within the scope of accounting for expected credit losses. Since all lending to credit institutions is refundable on demand, the bank

72 VOLVOFINANS BANK 2019 NOTES

3.20 PROPERTY, PLANT AND EQUIPMENT and commercially feasible and the bank has sufficient resources 3.20.1 Owned assets to complete development and to use or sell the intangible asset. Property, plant and equipment are recognised as an asset in the The carrying amount includes all directly attributable expend- balance sheet if it is probable that the future economic benefits iture, e.g. the cost of materials and services, remuneration of will accrue to the bank and the cost of the asset can be reliably employees, registration of a legal right, amortisation of patents measured. and licences. Other development expenditure is recognised as an Property, plant and equipment are stated at cost less accu- expense in the income statement as incurred. Development ex- mulated depreciation and any impairment, plus any revaluation. penditure that has been capitalised in the balance sheet is recog- The carrying amount of an item of property, plant and equipment nised at cost less accumulated amortisation and any impairment. is derecognised on disposal or sale or when no future economic See also section 3.25.1.2 Fund for development expenditure. benefits are expected from the use or disposal/sale of the asset. Gains or losses arising on the sale or disposal of an asset consist 3.21.2 Licences of the difference between the consideration paid and the carrying Acquired licences are stated at cost less accumulated amount of the asset less any direct selling expenses. amortisation and impairment.

3.20.2 Leased assets for which the bank is a lessor 3.21.3 Subsequent expenditures All leases are accounted for in accordance with the rules for Subsequent expenditures for capitalised intangible assets are operating leases, which means that assets for which a lease recognised as an asset in the balance sheet only when they has been concluded (irrespective of whether the contracts are increase the future economic benefits for the specific asset finance or operating leases) are recognised in the same line of to which they relate. All other expenditure is recognised as the balance sheet as for the corresponding assets owned by the incurred. bank. 3.21.4 Basis of amortisation 3.20.3 Subsequent expenditures Amortisation is recognised in the income statement on a straight- Subsequent expenditures are added to the cost only if it is likely line basis over the expected useful life of the intangible asset. that the future economic benefits associated with the asset will Expected useful lives are reviewed at least annually. Amortisable accrue to the company and the cost can be reliably calculated. intangible assets are amortised from the date when they become All other subsequent expenditures are recognised in the income available for use. The estimated useful lives are: statement in the periods in which they are incurred. • Software 3–5 years The decisive factor in determining when a subsequent ex- • Licences 3 years penditure is added to cost is whether the expenditure is related to replacement of identified components, or their parts, at which such 3.22 IMPAIRMENT OF PROPERTY, PLANT AND expenditures are capitalised. In cases where a new component is EQUIPMENT AND INTANGIBLE ASSETS AND created, this expenditure is also added to cost. Any undepreciated INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES carrying amounts for replaced components, or their parts, are dis- 3.22.1 Impairment testing posed of and recognised as an expense at the time of replacement. The carrying amounts of the bank’s assets are tested for im- Repairs are recognised as expenses on an ongoing basis. pairment at the balance sheet date. If there is an indication of impairment, the recoverable amount of the asset is calculated in 3.20.4 Basis of depreciation accordance with IAS 36. Finance leases that are accounted for as operating leases are If, in testing for impairment, it is not possible to assign es- depreciated using the annuity method while all operating leases sentially independent cash flows to a particular asset, the assets are depreciated on a straight-line basis. Assets are depreciated are grouped to the lowest level where it is possible to identify on a straight-line basis over their estimated useful lives. The essentially independent cash flows – a “cash-generating unit”. estimated useful lives of fixtures and fittings are 3–5 years, and An impairment loss is recognised when the carrying amount for lease assets in accordance with the contracts’ terms of 1–6 of an asset or cash-generating unit (group of units) exceeds the years, and are written down to the estimated residual value. The recoverable amount. Impairment losses are recognised in the applied depreciation methods and​ useful lives of assets are re- income statement. viewed at each year-end. The residual value of assets is reviewed The recoverable amount is the higher of fair value minus each month. costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted using a discount 3.21 INTANGIBLE ASSETS rate which reflects the risk-free rate and the risk associated 3.21.1 Development with the asset. Development expenditure, where results or other knowledge are The bank continuously assesses assets used operating leases applied to achieve new or improved products or processes, is cap- for impairment. Impairment occurs if the carrying amount is higher italised in the balance sheet if the product or process is technically than the recoverable amount, which is the higher of the fair value

VOLVOFINANS BANK 2019 73 NOTES

less costs to sell or the value in use. Value in use is determined as The pension plan for the bank’s employees is considered a multi-­ the present value of remaining rents and the present value of the employer defined benefit pension plan. However, the bank has expected residual value. Assessment of the expected residual value made the assessment that Recommendation UFR 10 Financial is obtained from an external supplier. Reporting of the ITP2 Pension Plan that is Funded through An impairment loss is reversed if the value in use is less than Insurance with Alecta of the Swedish Financial Reporting the carrying amount. Board is applicable also for the bank’s pension plan. The bank Impairment losses are recognised as depreciation and does not have sufficient information to recognise these pension impairment of property, plant and equipment in the income plans in accordance with IAS 19 and therefore recognises the statement. plans as defined contribution plans in accordance with UFR 10. The bank’s obligations in respect of contributions to defined 3.22.2 Reversal of impairment losses contribution plans are recognised as an expense in the balance An impairment loss is reversed if there is an indication that the sheet as they are earned through the employees’ performance of impairment loss may no longer exist and there has been a change services for the bank over a period. in the assumptions on which the calculation of the recoverable amount was based. A reversal is only made to the extent that the 3.23.2.2 Termination benefits carrying amount of the asset after the reversal does not exceed An expense for remuneration in connection with the termination the carrying amount that would have been recognised, less any of employees is only recognised if the bank is demonstrably depreciation, if no impairment loss had been recognised. obliged, without a realistic possibility of withdrawal, by a formal Reversals of impairment losses are recognised as depreciation detailed plan to terminate an employment before the normal and impairment of property, plant and equipment in the income time. When remuneration is paid as an offer to encourage statement. voluntary termination, an expense is recognised if it is likely that the offer will be accepted and the number of employees that will 3.23 LIABILITIES AND EQUITY accept the offer can be reliably estimated. When the bank issues a financial instrument, this instrument, or its components, are recognised on initial recognition as a finan- 3.23.2.3 Short-term employee benefits cial liability, as a financial asset or as an equity instrument on the Short-term employee benefits are not discounted and are recog- basis of the economic substance of the terms which apply for nised as an expense when the related services are rendered. A the instrument and in accordance with the definitions of financial provision is recognised for the expected expense for bonus pay- liability, financial asset and equity instrument. ments when the bank has a valid legal or constructive obligation to make such payments in consequence of receiving services 3.23.1 Share capital from employees and the obligation can be reliably measured. 3.23.1.1 Dividends Dividends are recognised as a liability on approval of the divi- 3.24 GROUP CONTRIBUTIONS AND APPROPRIATIONS dend by the Annual General Meeting. Group contributions are recognised in accordance with the alternative rule in RFR 2, and both paid and received Group 3.23.1.2 Fund for development expenditure contributions are recognised as appropriations. The capitalised amount of self-generated development costs Appropriations comprise provisions to and withdrawals from is transferred from unrestricted equity to the fund for develop- untaxed reserves. Untaxed reserves are recognised inclusive of ment expenditure (development fund) under restricted equity. deferred tax liability. The fund will decrease in line with depreciation/amortisation or impairment of expenditure. NOTE 4. SEGMENT REPORTING The bank’s operations are divided into operating segments 3.23.2 Post-employment benefits based on which areas of operation are monitored by the bank’s 3.23.2.1 Retirement benefits through insurance chief operating decision maker. The operations are organised The bank’s pension plans for collectively agreed occupational so as to enable management to monitor the results, returns pensions are secured through an insurance policy with Alecta. and cash flows generated by the various services. The internal Under IAS 19, a defined contribution plan is a plan for post-­ reporting is arranged so that management is able to monitor employment benefits under which the bank pays fixed contri- the results of all services. On the basis of this reporting, the butions to a separate legal unit and has no legal or constructive bank has identified the segments Cars, Trucks and Fleet. obligation to pay further contributions in the event that this legal All operating income comes from external customers and all entity does not have sufficient assets to pay all employee bene- of the bank’s operations are conducted in Sweden. fits relating to employee service in the current and prior periods. A defined benefit pension plan is defined as a plan for post-­ employment benefits that is not a defined contribution plan.

74 VOLVOFINANS BANK 2019 NOTES

CARS

The Cars segment consists of two businesses – Sales 2019 2018 Change Finance and the Cards/Payments business – which are Net interest income* 528,796 484,284 44,512 both aimed at consumers and smaller companies. Dividend received 308 16,352 - 16,044 Commission income 265,516 263,662 1,854 Vehicles sold in Swedish Volvo dealerships are financed with- Commission expense - 41,199 - 43,034 1,835 in Sales Finance through loans or leases, often as packaged Net income/expense from solutions that also include insurance, a credit card and servic- financial transactions 600 - 415 1,015 ing agreements. A partnership has been initiated with Polestar Other income 10,442 8,135 2,307 Performance AB, a new car make owned by Volvo Cars and Geely, Operating income 764,464 728,984 35,480 where customers in early 2020 will be able to order their car and Expenses** - 425,030 - 378,044 - 46,986 obtain financing from Volvofinans entirely digitally, directly on the Credit losses - 14,961 - 15,161 200 Internet. The Cards/Payments business offers both card payments Credit risk provision - 436 2,101 - 2,537 and digital payment solutions in CarPay. The bank provides smooth Operating profit 324,036 337,881 - 13,845 payments for all needs relating to car usage, as well as everywhere where Visa transactions are accepted, which generate bonus * Including depreciation and impairment of lease assets. cheques in a loyalty programme. ** Including depreciation of property, plant and equipment and amortisation of intangible assets, excluding depreciation and impairment of lease assets. The Swedish new car market has been strong for a number of years and 2019 was the third best year to date with 356,036 new Product information, passenger car registrations, 0.7% more than in 2018. A total of loans and leases 2019 2018 Change 81,675 new Volvo, Renault and Dacia car registrations were made, Number of contracts 202,763 207,725 - 4,962 representing a market share of 22.9%, with a continued high per- Total volume, SEKm - 26,335 26,560 - 225 centage of vehicle financing through Volvofinans. On a cumulative of which transferred, % 93.6 93.1 0.5 basis, the portfolio of loans and leases decreased slightly over of which pledged, % 6.4 6.9 - 0.5 the year, with 4,962 loans and leases. At 31 December 2019, the of which loans, % 45.5 45.3 0.2 portfolio comprised 202,763 contracts. In the Payments business, of which leases, % 54.5 54.7 - 0.2 the bank is seeing a positive trend both in terms of the volume of Share of total leases that are card purchases and interest-bearing loans. Together with Sweden’s private leases, % 25.02 27.0 - 2.0 Volvo dealers and other stakeholders in the ecosystem, Volvofinans Bank is continuously developing new products and launching Product Information, Card 2019 2018 Change new digital services. To add value for the customers, the bank has Number of active accounts, Ø 420,607 423,909 - 3,302 developed the CarPay service, which has now been downloaded Total volume, SEKm 1,801 1,779 22 by nearly 500,000 customers. Digital payments and services are Number of credit customers, Ø 86,908 88,304 - 1,396 also examples of innovation to meet demand from our customers Total sales and build a foundation for the future in the ecosystem. Using their Volvo Card, SEKm 15,083 14,292 791 mobile phones, the bank’s customers can now pay digitally for car of which fuel, % 39.6 41.5 - 1.9 servicing and fuel at Tanka service stations and for other purchas- of which workshop, % 13.2 13.1 0.1 es via Samsung Pay, which are areas where the bank is seeing of which stores, % 1.5 1.7 - 0.2 strong growth in demand and has several other development of which carwash, % 1.2 1.3 - 0.1 initiatives. In the first quarter of 2020, customers will, for example, of which sales outside of also be able to pay for their purchases via Apple Pay. This makes Volvo dealerships, % 32.6 29.6 3.0 life a little easier for our customers and partners – a smarter way to of which other (incl. loans manage your car payments. and insurance), % 11.9 12.8 - 0.9

VOLVOFINANS BANK 2019 75 NOTES

TRUCKS

In the Trucks business area, the bank offers both loan and 2019 2018 Change lease financing on new and used trucks, including trailers, Net interest income* 44,313 39,751 4,562 add-ons and other equipment. The Volvo Truck Card is also Commission income 10,387 10,081 306 part of Trucks. Commission expense - 215 - 195 - 20 Net income/expense from Demand for trucks has remained strong and 2019 was the best financial transactions 80 - 47 127 year to date, with 6,652 new vehicle registrations, although Other income 665 990 - 325 Volvo Trucks’ market share was slightly lower than in the last Operating income 55,230 50,579 4,651 few years. The bank’s share of financing for new trucks has Expenses** - 35,501 - 37,424 1,923 remained stable, and more than one in two trucks are financed Credit losses - 59 - 321 262 via truck loans, finance leases or operating leases. The financing Credit risk provision - 175 338 - 513 volume of used cars trailers is at a high level. Work is continu- Operating profit - 19,495 13,172 6,323 ously being carried out in product development and marketing of financial offers along with Volvo Trucks and the Volvo dealers. * Including depreciation and impairment of leased assets. The development of future services and financial solutions in ** Including depreciation of property, plant and equipment and amortisation of intangible assets, excluding depreciation and impairment of lease assets. Fleet Management and smoother payment solutions are examples of areas in which the bank, alongside Volvo Trucks, is creating the Product information, right conditions for increased customer value in future. Within this loans and leases 2019 2018 Change area, the eControl service – unique within this sector – has been Number of contracts 6,490 6,793 - 303 launched. This is an invoice management service and cost mon- Total volume, SEKm 4,156 4,221 - 65 itoring system, and is aimed principally at small and medium­- of which transferred, % 80.3 77.7 2.6 sized haulage companies. of which pledged, % 19.4 22.3 - 2.9 The per kilometre financing solution and eControl are exam- of which loans, % 77.3 76.8 0.5 ples of the development work taking place in the bank – all so of which leasing, % 22.7 23.2 - 0.5 that we can offer Volvo customers smarter truck financing. Share of total leases that are operating leases, % 24.4 28.2 - 3.8

Product Information, Card 2019 2018 Change Number of active accounts Volvo Truck Card, Ø 1,441 1,529 - 88 Total Sales Volvo Truck Card, SEKm 324 364 - 40 of which workshop, % 56.6 56.8 - 0.2 of which stores, % 12.5 12.4 0.1 of which carwash, % 6.1 5.3 0.8 of which other (incl. loans and insurance), % 8.8 7.2 1.6 of which fuel, % 16.1 18.3 - 2.2

76 VOLVOFINANS BANK 2019 NOTES

FLEET

The Fleet segment administers and finances fleets for mainly 2019 2018 Change medium-sized and larger companies, regardless of which car Net leasing * 48,273 32,835 15,438 brands customers choose to use. Change in impairment of residual value 17,551 58,787 - 41,236 Servicing and repair agreements are also offered here, along with Commission income 163,533 117,096 - 46,437 tyre warranties. The business concept is to make things simpler Commission expense - 755 - 686 - 69 for the bank’s customers by creating smarter car financing in Net income/expense from the form of a competitive company car cost for drivers and financial transactions 171 - 101 272 companies alike. The Fleet business area’s ambition is to use Servicing and repair its market-leading position to achieve economies of scale in agreements 56,572 42,289 14,283 administration and purchasing. In 2019, Fleet strengthened Other income 523 310 213 its market-leading position with 22.4% of the market in Operating income 285,868 250,530 35,338 December. The number of agreements has continued to increase Expenses** - 112,960 - 99,918 - 13,042 at a good pace and has risen by approx. 4% compared with the Credit losses - 361 90 - 451 corresponding period of the previous year. The majority of newly- Credit risk provision 9 45 - 36 signed agreements were in the operating lease category. Operating profit 172,556 150,746 21,810

During the year, the bank made a reversal of SEK 17.6 * Including depreciation and impairment of leased assets. million (58.8) of a previously made impairment due to residual ** Including depreciation of property, plant and equipment and amortisation of value risk. Most of last year’s reversal, SEK 45.8 million, was due intangible assets, excluding depreciation and impairment of lease assets. to a new agreement with a buyer of cars in the Fleet business.

Product Information 2019 2018 Change Number of financing agreements 35,437 33,713 1,724 Number of administered agreements - 47,588 45,860 1,728 Total volume, SEKm - 7,382 7,020 362 of which operating leases, % 68.5 68.4 0.1 of which finance leases, % 31.5 31.6 - 0.1

VOLVOFINANS BANK 2019 77 NOTES

BALANCE SHEET

NOTE 5. NET INTEREST INCOME Combined net interest income Lease income from finance leases Interest income 2019 2018 (recognised as operating leases in Loans and advances to credit institutions 40 13 the balance sheet) 3,267,138 3,004,639 Loans and advances to customers 544,320 480,944 Scheduled depreciation for finance leases (recognised as operating leases Debt securities 491 1,525 in the balance sheet) - 3,029,371 - 2,817,543 Other interest income – 12 Net lease income from finance leases* 2 37,767 187,096 Total 544,851 482,494 Of which interest income from assets Interest income 544,851 482,494 recognised at amortised cost 544,843 482,494 Interest expense - 335,319 - 256,698 Combined net interest income** 447,298 412,892 Interest expense Liabilities to credit institutions - 21,925 - 22,234 Total lease and net interest income Retail deposits and borrowings - 140,054 - 102,471 Net lease income from contracts Cost for deposit guarantee scheme - 20,537 - 7,877 recognised as operating leases 411,900 331,160 Investments in debt securities - 2,516 - 10,727 Net interest income in accordance with Note 5 209,532 225,796 Issued debt securities - 86,992 - 54,289 Total lease and net interest income 621,432 556,956 Derivatives - 17,298 - 7,820 Subordinated debts - 5,601 - 3,231 Interest margin***, % 1.24 1.21 Other interest expenses - 40,396 - 48,049 Average lending rate, % 2.20 1.94 Total - 335,319 - 256,698 Average deposit rate (incl. cost Of which interest expense from financial for deposit guarantee scheme), % 0.78 0.67 assets recognised at amortised cost - 2,516 - 10,727 Net interest income 209,532 225,796 * Finance leases recognised as operating leases, net. ** Combined net interest income is affected partly by interest expenses for financing operating leases and partly by the building-up of a liquidity Interest income from items measured at fair value is negative. reserve by the bank. The income refers to the swaps that are used to eliminate the ***  Total interest income as a percentage of average total assets less total interest expense as a percentage of average total assets excluding average interest rate risk in the bank’s fixed-rate lending. equity and untaxed reserves.

NOTE 6. LEASE INCOME AND COMBINED NOTE 7. DIVIDENDS RECEIVED NET INTEREST INCOME 2019 2018 All leases are accounted for as operating leases in the balance Shares and interests 308 16,352 sheet (even if the lease is a finance lease based on the substance Total 308 16,352 of the contract) and the (gross) income from these contracts is recognised as lease income. The dividend in 2018 is partly derived from Visa Sweden's sale of its share in Visa Europe Ltd to Visa Inc., where the total pay- Net lease income 2019 2018 ment consisted of a combination of cash and shares distributed Lease income from contracts recognised to the various members of Visa Sweden. The bank’s share of this as operating leases 5,659,891 5,318,171 dividend consisted of SEK 14 million cash, of which SEK 1 million Scheduled depreciation for contracts recognised as operating leases - 5,247,991 - 4,987,011 was a guaranteed future dividend in 2019. The dividend consisted of Series C Convertible Participating Preferred Stock in Visa Lease income from contracts recog- nised as operating leases, net 411,900 331,160 Inc., and as there were no liquid quoted prices for the instrument its market value was to some extent determined using the bank’s own internal assumptions.

78 VOLVOFINANS BANK 2019 NOTES

NOTE 8. COMMISSION INCOME NOTE 12. GENERAL ADMINISTRATIVE

2019 2018 EXPENSES Commission income, credit cards 191,865 189,413 2019 2018 Commission income, loans and leases 247,571 201,426 Salaries and fees - 126,561 - 112,160 Total 439,436 390,839 Social security contributions - 41,028 - 36,895 Cost for pension premiums* - 20,050 - 18,108 NOTE 9. COMMISSION EXPENSE Payroll tax - 4,874 - 4,449

2019 2018 Other staff costs - 5,995 - 4,782 Payment processing commissions - 4,664 - 4,340 Total staff costs - 198,508 - 176,394 Other commissions - 37,505 - 39,575 Rents and other premises costs - 15,661 - 12,812 Total - 42,169 - 43,915 IT costs - 215,699 - 165,542 Consulting services - 22,852 - 10,278 NOTE 10. NET INCOME/EXPENSE FROM Contract staff - 7,214 - 4,476 FINANCIAL TRANSACTIONS* Audit - 1,700 - 1,700 GAIN/LOSS BY MEASUREMENT CATEGORY Postage and telephone - 4,324 - 4,807 INCLUDING EXCHANGE RATE CHANGES Other - 14,069 - 13,138 Total other general administrative 2019 2018 expenses - 281,519 - 212,753 Derivative assets intended for risk Total general administrative expenses - 480,027 - 389,147 management, no hedge accounting 4,718 19,021 Derivative liabilities intended for risk * Total pension premiums were KSEK 20,091 (18,340), of which KSEK 10,462 management, no hedge accounting - 2,980 - 20, 161 (9,741) refer to Alecta ITP 2 pensions. Of the bank’s retirement benefit costs, KSEK 4,747 (4,578) refer to the bank’s senior executives (11 (10) people). The Financial liabilities at amortised cost** - 1,069 – bank has no outstanding pension obligations. Change in fair value of derivatives that are hedging instruments in a fair value hedge - 932 - 1,423 Expected fees in the next reporting period for ITP2 insurance Change in fair value of hedged item policies with Alecta are KSEK 9,521 (8,122). The bank’s share attributable to the hedged risk in a fair value hedge 1,114 2,000 of the total contributions to the plan and the bank’s share of the total number of active members of the plan is 0.04% and 0.03% Total 851 - 563 respectively. The collective funding ratio is defined as the market * Financial assets valued at amortised cost amounted to 0. value of Alecta’s assets as a percentage of its commitments to ** Also include realised premium or discount on repurchase of debt. policyholders calculated using Alecta’s actuarial methods and as- sumptions, which do not comply with IAS 19. The collective fund- NOTE 11. OTHER OPERATING INCOME ing ratio should normally be permitted to vary within a range of 2019 2018 125–155%. If Alecta’s collective funding ratio were to fall below Capital gain on disposal of 125% or exceed 155% it would be necessary to take measures property, plant and equipment 808 630 that will enable the ratio return to the normal range. In case of a Servicing and repair agreement income 56,572 42,289 low collective funding ratio one measure that can be taken is to Income from associates 3,426 1,077 raise the agreed price for new subscriptions and expansion of the Other operating income 7,396 7,728 existing benefits. A high collective funding ratio can be addressed Total 68,202 51,724 by reducing premiums. At year-end 2019, Alecta’s surplus in the form of the collective funding ratio was 148% (142).

VOLVOFINANS BANK 2019 79 NOTES

BREAKDOWN OF SALARIES AND OTHER REMUNERATION BY SENIOR EXECUTIVES AND OTHER EMPLOYEES, AND SOCIAL SECURITY CONTRIBUTIONS

2019 2018 Senior executives Senior executives (22 people) Other employees Total (21 people) Other employees Total Salaries and other remuneration - 17,230 - 109,331 - 126,561 - 16,355 - 95,805 - 112,160 of which, variable remuneration (–) (- 558) (- 558) (–) (- 654) (- 654) Total - 17,230 - 109,331 - 126,561 - 16,355 - 95,805 - 112,160

Social security contributions - 10,277 - 55,674 - 65,951 - 9,049 - 50,403 - 59,452 of which, retirement benefit costs (- 4,747) (- 20,177) (- 24,924) (- 4,578) (- 17,979) (- 22,557)

SALARIES AND FEES The members of the Board receive fixed Directors’ fees in accordance with the resolution of the AGM. The remuneration payable to the CEO is decided by the Board based on a proposal from the Remuneration Committee. The remuneration payable to other senior executives is decided by the CEO. The remuneration to the CEO and other senior executives consists of basic salary, other benefits and pension. The term “other senior executives” refers to the ten people who, together with the CEO, constitute the management team. The contractual retirement age is 65 years. In case of termination of the CEO’s employment contract by the bank, the CEO is entitled to severance pay for 12 months plus a period of up to an additional 12 months if new employment is not found. The Remuneration Committee consists of the Chairman of the Board and two further Directors. Variable remuneration is not paid to members of the bank’s management team, employees who make decisions on credits/limits or in the compliance, risk control and internal audit control functions.

SALARIES AND REMUNERATION OF SENIOR EXECUTIVES

Variable Retirement Basic salary/fee remuneration Other benefits benefit cost Total 2019 Chairman of the Board - 775 – – – - 775 Vice Chairman of the Board - 525 – – – - 525 Directors (9 people) - 1,500 – – – - 1,500 CEO - 2,783 – - 177 - 1,060 - 4,020 Other senior executives (10 people) - 11,647 – - 892 - 3,687 - 16,226 Total - 17,230 – - 1,069 - 4,747 - 23,046

2018 Chairman of the Board - 775 – – – - 775 Vice Chairman of the Board - 500 – – – - 500 Directors (9 people) - 1,900 – – – - 1,900 CEO - 2,659 – - 189 - 1,007 - 3,855 Other senior executives (9 people) - 10,521 – - 903 - 3,501 - 14,925 Total - 16,355 – - 1,092 - 4,508 - 21,955

80 VOLVOFINANS BANK 2019 NOTES

REMUNERATION OF THE BOARD OF DIRECTORS

Name Position (2019/2018) 2019 2018 Urmas Kruusval Chairman - 775 - 775 Synnöve Trygg Vice Chairman - 525 - 500 Ann Hellenius Director - 250 - 250 Anders Gustafsson Deputy/Director - 50 - 150 Per Avander Director - 300 - 200 Tommy Andersson Director - 200 - 400 Patrik Tolf Director - 225 - 450 Janola Gustafson Deputy - 125 - 100 Björn Rentzhog Board Member/Deputy member - 150 - 100 Pascal Bellemans Deputy - 50 - 100 Kristian Elvefors Board Member/Deputy member - 100 - 150 Jonas Estéen Deputy - 50 – Elisabeth Mosséen Director – – Total - 2,800 - 3,175

Loans to senior executives 2019 2018 Senior executives’ loans in the company 152 347 Chief Executive Officer and Executive Vice President – – Directors and Deputy Board members – 112 Total 152 459

Loans to senior executives amounted to KSEK 152 (459). The amount of interest for these people amounted to KSEK 3 (8). The terms and conditions of loans to senior executives are the same as for the bank’s other employees.

EMPLOYEE INFORMATION 2019 2018 Men Women Total Men Women Total Average number of employees 99 121 220 88 119 207

Gender distribution in management CEO 1 – 1 1 – 1 Board 8 3 11 9 2 11 Other senior executives 8 2 10 7 2 9 Number 17 5 22 17 4 21

AUDITORS’ FEES AND EXPENSES

KPMG 2019 2018 Audit engagement - 1,700 - 1,700 Audit services in addition to audit engagement - 270 - 220 Tax advisory services - 13 - 25 Other services - 19 - 97 Total - 2,002 - 2,042

VOLVOFINANS BANK 2019 81 NOTES

NOTE 13. DEPRECIATION, AMORTISATION NOTE 16. APPROPRIATIONS AND IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS 2019 2018

2019 2018 Accelerated depreciation - 498,268 - 498,479 Scheduled depreciation Total - 498,268 - 498,479 and amortisation - 5,256,135 - 4,993,387 Reversal of impairment losses for the year 17,700 58,862 NOTE 17. TAX ON PROFIT FOR THE YEAR Impairment - 9,696 - 7,297 Total - 5,248,131 - 4,941,822 2019 2018 Scheduled depreciation and Tax expense for the year - 4,661 - 3,320 amortisation Total reported tax expense - 4,661 - 3,320 Fixtures and fittings - 3,755 - 1,991

Lease assets - 5,247,991 - 4,987,011 Reconciliation of Intangible assets - 4,389 - 4,385 effective tax 2019 2018 Total - 5,256,135 - 4,993,387 Profit before tax - 17,820 3,320 Tax at applicable Net impairment tax rate - 21,4% - 3,814 - 22.0.2% - 730 Lease assets 17,503 58,701 Non-deductible expenses - 4,8% - 847 - 78.1% - 2,592 Intangible assets - 9,499 - 7,136 Non-taxable income – – 0.1% 2 Total 8,004 51,565 Reported effective tax - 26.2% - 4,661 - 100.0% - 3,320 NOTE 14. OTHER OPERATING EXPENSES

2019 2018 Fees to central organisations - 3,701 - 3,030 Insurance costs - 1,368 - 1,259 Marketing costs - 53,175 - 52,339 Other operating expenses - 17,577 - 56,099 Total - 75,821 - 112,727

NOTE 15. NET CREDIT LOSSES

Loans at amortised cost (incl undrawn portion of limit) 2019 2018 Change in credit loss provision stage 1 - 222 2,121 Change in credit loss provision stage 2 200 - 466 Net credit losses, non-credit- impaired lending - 22 1,655

Change in credit loss provision stage 3 - 638 552 Write-off of actual losses for the period - 17,658 - 17,567 Recovery of actual credit losses 2,277 2,175 Net credit losses, credit-impaired lending - 16,019 - 14,840 Total net credit losses - 16,041 - 13,185

82 VOLVOFINANS BANK 2019 NOTES

VOLVOFINANS BANK 2019 83 84 VOLVOFINANS BANK 2019 NOTES

BALANCE SHEET

NOTE 18. CHARGEABLE TREASURY BILLS, ETC.

Carrying amount Carrying amount 31 Dec 2019 31 Dec 2018 Securities issued by the State – – Securities issued by local authorities and other public sector entities 1,429,949 1,245,816 Total 1,429,949 1,245,816

Positive difference due to carrying amounts exceeding nominal values - 11,949 5,816 Total - 11,949 5,816

All assets in the balance sheet item are included in stage 1 in the calculation of expected credit losses, which means that there has been no significant increase in credit risk and that the loss reserve is calculated on the basis of expected losses for the next 12 months. The accumulated loss provision for expected credit losses recognised in the income statement and which decreases the carrying amount of the balance sheet item amounts to KSEK 535.

NOTE 19. LOANS AND ADVANCES TO CREDIT INSTITUTIONS

31 Dec 2019 31 Dec 2018 Gross outstanding receivables in Swedish currency 1,281,290 1,622,571 of which, to Swedish commercial banks - 1,281,287 1,622,567 of which, payable on demand 1,281,290 1,622,571

The credit quality of loans and advances to credit institutions is very high. The item consists of deposits with major Nordic banks, which at the balance sheet date had ratings of Aa2–A3 on Moody’s scale. Due to receivables to credit institutions being payable on demand, the expected credit losses are negligible, which is why any loss provision for expected credit losses is not recognised.

NOTE 20. LOANS AND ADVANCES TO CUSTOMERS The bank’s total lending including lease assets is SEK 37.93 billion (37.28). The stated values are reduced by impairment for credit risk for each credit. For lending to customers, the values are KSEK 24,987 (24,193) lower than the gross values of the receivables. See also Notes 21, 25 and 26. The bank’s loans and advances to customers consist of card credits, car loans, hire purchase agreements and inventory credits. Recognised loss provisions include loss provisions for loan commitments (undrawn card limits). Total loan commitments amounted to SEK 10,262,200 (10,138,183).

31 Dec 2019 31 Dec 2018 Gross outstanding receivables in Swedish currency 17,303,068 16,946,953 Impairment for credit losses - 24,987 - 24,193 Net carrying amount 17,278,081 16,922,760

VOLVOFINANS BANK 2019 85 NOTES

CHANGES IN RECOGNISED GROSS VALUE AND LOSS PROVISIONS

Non-credit-impaired Credit-impaired 31 Dec 2019 Stage 1 Stage 2 Stage 3 Total Gross carrying amount Gross carrying amount as at 1 Jan 2019 16,054,405 741,782 150,766 16,946,953 Financial assets, new contracts at end of year* 6,144,710 158,894 20,801 6,324,406 Financial assets, completed contracts at beginning of year** - 2,913,767 - 155,592 - 47,186 - 3,116,546

Net changes in stage*** In stage 1 - 2,646,859 - 2,646,859 In stage 2 - 67,366 - 67,366 In stage 3 - 4,057 - 4,057

Transfers between stages**** From and to stage 1 (to and from stages 2 and 3) - 180,625 - 180,625 From and to stage 2 (to and from stages 1 and 3) 92,086 92,086 From and to stage 3 (to and from stages 1 and 2) - 44,924 - 44,924 Gross carrying amount as at 31 Dec 2019 16,457,864 769,804 75,400 17,303,068

Loss provisions Loss provision as per 1 Jan 2019 - 9,275 - 8,364 - 6,554 - 24,193 Financial assets for new contracts at end of year - 994 - 348 - 545 - 1,887 Financial assets for completed contracts at beginning of year 377 1,267 4,454 6,097

Net changes in stage*** In stage 1 368 368 In stage 2 - 357 - 357 In stage 3 - 18 - 18

Transfers between stages**** From and to stage 1 (to and from stages 2 and 3) 27 27 From and to stage 2 (to and from stages 1 and 3) - 362 - 362 From and to stage 3 (to and from stages 1 and 2) - 4,525 - 4,525 Change in interest reserves - 138 - 138 Loss provisions as per 31 Dec 2019 - 9,497 - 8,164 - 7,326 - 24,987

Opening balance as at 1 Jan 2019 16,045,130 733,418 144,212 16,922,760 Closing balance as at 31 Dec 2019 16,448,367 761,640 68,074 17,278,081

Gross loans and advances to customers increased by approxi- eliminations of SEK 4.5 million (4.8) for assets in stage 3, and to a mately SEK 356 million (444) during the course of the year. This change in loss provisions for assets transferred to stage 3 during consists of new contracts worth SEK 6.3 billion (6.3). Contracts the year of SEK 4.5 million (3.9). For assets with no movement paid off or contracts withdrawn for another reason (e.g. actual to another stage the net loss provisions remained unchanged loss) have resulted in the value falling by SEK 3.1 billion (3.0). For (SEK 1.7 million). In 2018, the change in CF for the card limits contracts that were in place both at the beginning and the end resulted in a reversal of SEK 4.1 million for the loss provisions. of the year, the gross value has gone down by SEK 2.9 billion No changes to the risk variables occurred in 2019. The total (2.8). The largest increase in gross value occurred in stage 1. The loss provision for the year was SEK 0.8 million (-2.1), from an increased lending resulted in an increase in provisions for losses of opening value of SEK 24.2 million (26.3) to a closing value of around SEK 1.9 million (2.0), of which the two largest changes re- SEK 25.0 million (24.2). fer to assets that were terminated during the year, which resulted in

86 VOLVOFINANS BANK 2019 NOTES

Non-credit-impaired Credit-impaired 31 Dec 2018 Stage 1 Stage 2 Stage 3 Total Gross carrying amount Gross carrying amount as at 1 Jan 2018 15,770,374 668,788 63,809 16,502,971 Financial assets, new contracts at end of year* 6,035,888 187,296 46,563 6,269,747 Financial assets, completed contracts at beginning of year** - 2,815,317 - 139,024 - 41,784 - 2,996,125

Net changes in stage*** In stage 1 - 2,643,922 - 2,643,922 In stage 2 - 42,244 - 42,244 In stage 3 - 1,130 - 1,130

Transfers between stages**** From and to stage 1 (to and from stages 2 and 3) - 292,618 - 292,618 From and to stage 2 (to and from stages 1 and 3) 66,966 66,966 From and to stage 3 (to and from stages 1 and 2) 83,308 83,308 Gross carrying amount as at 31 Dec 2018 16,054,405 741,782 150,766 16,946,953

Loss provisions Loss provision as per 1 Jan 2018 - 11,378 - 7,898 - 6,976 - 26,252 Financial assets for new contracts at end of year - 989 - 429 - 596 - 2,014 Financial assets for completed contracts at beginning of year 453 1,225 4,725 6,403

Net changes in stage*** In stage 1 1,227 1,227 In stage 2 - 1,624 - 1,624 In stage 3 - 1,288 - 1,288 Change in risk variables***** 1,238 1,261 1,594 4,093

Transfers between stages**** From and to stage 1 (to and from stages 2 and 3) 174 174 From and to stage 2 (to and from stages 1 and 3) - 899 - 899 From and to stage 3 (to and from stages 1 and 2) - 3,859 - 3,859 Change in interest reserves - 154 - 154 Loss provisions as per 31 Dec 2018 - 9,275 - 8,364 - 6,554 - 24,193

Opening balance as at 1 Jan 2018 15,758,996 660,890 56,833 16,476,719 Closing balance as at 31 Dec 2018 16,045,130 733,418 144,212 16,922,760

* Car loans, card credits, hire purchase agreements and inventory credits taken out during the year. The gross amount shown in the table is the gross carrying amount at the end of the first month of the contract. ** Car loans, card credits, hire purchase agreements and inventory credits taken out before the start of the year and completed during the year. The gross carrying amount shown in the table is for the month that the contract was completed. The amounts refer to final paid contracts or contracts that have ended due to an actual bad debt. *** Net changes in the stage include the following types of changes: for car loans, this heading will cover changes in the loss provision due to a change in credit risk during the year but which have not led to a change in the stage covered in the section “Transfers between stages below”. For card credits, the same type of change as for car loans is covered in this section. In addition, changes in expected credit loss due to an increase or decrease in utilised credit limit are also covered for such card credits (contracts) that were taken out at the beginning of the year. The amounts also include changes in gross carrying amounts that arose during periods before a contract was completed. As with card credits, changes due to a change in credit risk and change in the undrawn limit are covered. **** Transfers between stages include car loans, card credits, hire purchase agreements and inventory credits that were part of a different stage in the CB than in the OB. As regards the change in the loss provision, this also includes changes in the loss provision for undrawn limits. ***** Changes in risk variables refer in their entirety to the change made to the credit conversion factor (CF) variable for the undrawn card limits in 2018.

VOLVOFINANS BANK 2019 87 NOTES

GROSS CARRYING AMOUNT AND LOSS PROVISION – SECTOR BREAKDOWN

31 December 2019 31 December 2018 Gross carrying Net carrying Gross carrying Net carrying amount Loss provision amount amount Loss provision amount Loans and advances to customers Retail customers 12,863,443 - 22,831 12,840,612 12,984,330 - 22,386 12,961,943 Corporate customers Transport - 2,423,028 - 919 - 2,422,109 2,338,508 - 751 2,337,758 Sale and service of motor vehicles - 1,214,120 - 177 1,213,943 875,014 - 174 874,841 Construction 302,891 - 377 302,514 290,060 - 402 289,658 Other loans and advances to companies 499,586 - 683 498,903 459,041 - 481 458,560 Total loans and advances to customers 17,303,068 - 24,987 17,278,081 16,946,953 - 24,193 16,922,760

NOTE 21. BONDS AND OTHER DEBT SECURITIES

Carrying amount Carrying amount Issued by Swedish borrowers 31 Dec 2019 31 Dec 2018 Mortgage lenders 1,415,612 1,431,707 Non-financial corporations 933,940 800,260 Total 2,349,552 2,231,967

Positive difference due to carrying amounts exceeding nominal values 15,552 17,967 Total 15,552 17,967

All assets in the balance sheet item are included in stage 1 in the calculation of expected credit losses, which means that there has been no significant increase in credit risk and that the loss reserve is calculated on the basis of expected losses for the next 12 months. The accumulated loss provision for expected credit losses recognised in the income statement and which decreases the carrying amount of the balance sheet item amounts to KSEK 309.

88 VOLVOFINANS BANK 2019 NOTE 22. SHARES AND INTERESTS IN ASSOCIATES AND OTHER COMPANIES

31 Dec 2019 31 Dec 2018 Unlisted securities Carrying amount, 1 January 23,777 20,417 Settlement shares limited partnership previous years - 15,945 – Dividend for the year from Visa 0 2,283 Share of profit for the year of limited partnerships 3,426 1,077 Carrying amount, 31 December 11,258 23,777

Carrying Profit/loss Equity Share of equity amount 2019 Visa Inc C – – – 2,331 Volvohandelns PV Försäljnings AB*, corp. ID no. 556430-4748, Gothenburg 2,351 38,951 12,854 1,000 Volvohandelns PV Försäljnings KB, corp. ID no. 916839-7009, Gothenburg 374 37,785 2,595 2,595 VCC Tjänstebilar KB, corp. ID no. 969673-1950, Gothenburg 11,942 22,404 3,985 3,985 VCC Försäljnings KB, corp. ID no. 969712-0153, Gothenburg 1,389 116 1,347 1,347 Total 16,056 99,256 20,781 11,258

2018 Visa Inc C – – – 2,331 Volvohandelns PV Försäljnings AB*, corp. ID no. 556430-4748, Gothenburg 770 36,600 12,078 1,000 Volvohandelns PV Försäljnings KB, corp. ID no. 916839-7009, Gothenburg 1,715 83,077 17,723 17,723 VCC Tjänstebilar KB, corp. ID no. 969673-1950, Gothenburg 4,700 18,182 3,573 3,573 VCC Försäljnings KB, corp. ID no. 969712-0153, Gothenburg - 2,106 - 6,821 - 849 - 849 Total 5,079 131,038 35,525 23,777

* Volvohandelns PV Försäljnings AB is general partner in all limited partnerships.

The bank owns 33% of Volvohandelns PV Försäljnings AB, 25% of Volvohandelns PV Försäljnings KB, 25% of VCC Tjänstebilar KB and 25% of VCC Försäljnings KB. At the AGM each person entitled to vote has the right to vote the full number of shares represented by him or her. In 2019, profits of the limited partnerships were settled with the partners.

VOLVOFINANS BANK 2019 89 NOTES

NOTE 23. SHARES AND INTERESTS IN GROUP COMPANIES Autofinans Nordic AB, CarPay Sverige AB, Volvofinans Leasing AB and Volvofinans IT AB are wholly owned, dormant subsidiaries.

Corp. ID no. Regd office Earnings in 2019 Unlisted securities CarPay Sverige AB 556268-7052 Gothenburg – Volvofinans IT AB 556004-3621 Gothenburg – Volvofinans Leasing AB 556037-5734 Gothenburg – Autofinans Nordic AB 556094-7284 Gothenburg –

Number Shares in wholly owned Group companies of shares Nom. value 2019 2018 CarPay Sverige AB 2,000 200 240 240 Volvofinans IT AB 400 200 242 242 Volvofinans Leasing AB 10,000 1,000 1,200 1,200 Autofinans Nordic AB 50,000 5,000 5,060 5,060 Total carrying amount of shareholdings 6,742 6,742

NOTE 24. INTANGIBLE ASSETS

Development expenditure Licenses Total Accumulated cost Opening balance, 1 Jan 2018 134,297 5,759 140,056 Purchases for the year 14,908 – 14,908 Impairment - 7,136 – - 7,136 Disposals - 53,368 - 5,759 - 59,127 Closing balance, 31 Dec 2018 88,700 – 88,700

Opening balance, 1 Jan 2019 88,700 – 88,700 Purchases for the year 7,403 – 7,403 Impairment - 9,499 – - 9,499 Disposals – – – Closing balance, 31 Dec 2019 86,605 – 86,605

Accumulated amortisation Opening balance, 1 Jan 2018 - 116,139 - 5,759 - 121,898 Amortisation for the year - 4,385 – - 4,385 Disposals 53,368 5,759 59,127 Closing balance, 31 Dec 2018 - 67,155 – - 67,155

Opening balance, 1 Jan 2019 - 67,155 – - 67,155 Amortisation for the year - 4,389 – - 4,389 Disposals – – – Closing balance, 31 Dec 2019 - 71,545 – - 71,545

Carrying amounts 31 Dec 2018 21,545 – 21,545 31 Dec 2019 15,060 – 15,060

All intangible assets are developed internally and have a useful life of three or five years. Assets are amortised on a straight-line basis over their useful life.

90 VOLVOFINANS BANK 2019 NOTES

NOTE 25. PROPERTY, PLANT AND EQUIPMENT, FIXTURES AND FITTINGS, AND LEASE ASSETS

Fixtures and fittings Lease assets Total Cost Opening balance, 1 Jan 2018 20,985 25,819,819 25,840,804 Purchases 6,174 10,553,099 10,559,273 Sales – - 7,886,961 - 7,886,961 Disposals - 2,480 – - 2,480 Closing balance, 31 Dec 2018 24,679 28,485,957 28,510,636

Opening balance, 1 Jan 2019 24,679 28,485,957 28,510,636 Purchases 9,441 10,204,378 10,213,819 Sales – - 9,300,395 - 9,300,395 Disposals - 7,272 – - 7,272 Closing balance, 31 Dec 2019 - 26,848 29,389,940 29,416,788

Depreciation Opening balance, 1 Jan 2018 - 18,685 - 7,051,466 - 7,070,151 Depreciation for the year - 1,991 - 4,987,011 - 4,989,002 Sales 5 3,983,765 3,983,770 Disposals 2,480 – 2,480 Closing balance, 31 Dec 2018 - 18,191 - 8,054,712 - 8,072,903

Opening balance, 1 Jan 2019 - 18,191 - 8,054,712 - 8,072,903 Depreciation for the year - 3,755 - 5,247,991 - 5,251,746 Sales – - 4,618,121 - 4,618,121 Disposals 7,231 – 7,231 Closing balance, 31 Dec 2019 - 14,715 - 8,684,582 - 8,699,297

Impairment Opening balance, 1 Jan 2018* – - 132,903 - 132,903 Reversal of impairment losses for the year – 58,862 58,862 Impairment for the year – - 161 - 161 Adjustment between loans and leases – - 20 - 20 Closing balance, 31 Dec 2018 – - 74,221 - 74,221

Opening balance, 1 Jan 2019 – - 74,221 - 74,221 Reversal of impairment losses for the year – 17,700 17,700 Impairment for the year – - 196 - 196 Closing balance, 31 Dec 2019 – - 56,717 - 56,717

of which, impairment of residual value risk (–) (- 56,373) (- 56,373)

Carrying amounts 1 Jan 2018* 2,300 18,635,450 18,637,750 31 Dec 2018 6,488 20,357,024 20,363,512

1 Jan 2019 6,488 20,357,024 20, 363, 512 31 Dec 2019 12,133 20,648,640 20,660,773

* OB 2018 has been adjusted by KSEK 4,127 in relation to the transition to IFRS 9.

VOLVOFINANS BANK 2019 91 NOTES

NOTE 26. OTHER ASSETS

31 Dec 2019 31 Dec 2018 Positive value of derivatives 11,022 12,999 Current tax asset 67,252 692 Trade receivables 701,270 735,720 of which non-cancellable lease income (674,615) (611,281) Other assets 156,498 137,717 Total 936,042 887,128

Trade receivables are offset against a credit risk provision of KSEK 31 (28) and an interest reserve of KSEK 2 (19) and recognised on a net basis in respect of fleet contracts.

92 VOLVOFINANS BANK 2019 NOTES

NOTE 27. DERIVATIVES – ASSETS AND LIABILITIES The bank’s derivatives are entered into directly with the counterparty. They are not cleared through a standardised marketplace. Accrued interest on derivatives is recognised in prepaid expenses and accrued income and accrued expenses and deferred income. This note presents that portion of the market value which arises from future changes in market interest rates. The total value of derivative assets in- cluding accrued interest is SEK 11.0 million (13.0) and the value of derivative liabilities including accrued interest is SEK 11.1 million (37.2).

2019 Liabilities Derivatives for which hedge Assets (positive (negative accounting is not applied Up to 1 year 1–5 year > 5 years Total market values) market values) Interest rate-related contracts Swaps 3,750 211,411 – 215,161 292 – Currency-related contracts Swaps (NOK) – 649,500 – 649,500 – - 9,757 Total 3,750 860,911 – 864,661 292 - 9,757

Derivatives for which hedge accounting is applied (fair value hedge) Interest rate-related contracts Swaps 1,150,000 700,000 – 1,850,000 10,730 - 1,313 Currency-related contracts Swaps (NOK) – – – – – – Total 1,150,000 700,000 – 1,850,000 10,730 - 1,313 Total 1,153,750 1,560,911 – 2,714,661 11,022 - 11,070

Breakdown of market value by currency SEK 1,153,750 911,411 – 2,065,161 11,022 - 1,313 NOK – 649,500 – 649,500 – - 9,757 Total 1,153,750 1,560,911 – 2,714,661 11,022 - 11,070

2018 Assets Liabilities Derivatives for which hedge (positive (negative accounting is not applied Up to 1 year 1–5 year > 5 years Total market values) market values) Interest rate-related contracts Swaps 16,458 156,946 – 173,405 101 - 7 Currency-related contracts Swaps (NOK) – 649,500 – 649,500 – - 35,781 Total 16,458 806,446 – 822,905 101 - 35,788

Derivatives for which hedge accounting is applied (fair value hedge) Interest rate-related contracts Swaps 300,000 1,850,000 – 2,150,000 12,898 - 1,408 Currency-related contracts Swaps (NOK) – – – – – – Total 300,000 1,850,000 – 2,150,000 12,898 - 1,408 Total 316,458 2,656,446 – 2,972,905 12,999 - 37,196

Breakdown of market value by currency SEK 316,458 2,006,946 – 2,323,405 12,999 - 1,414 NOK – 649,500 – 649,500 – - 35,781 Total 316,458 2,656,466 – 2,972,905 12,999 - 37,196

VOLVOFINANS BANK 2019 93 NOTES

HEDGING INSTRUMENTS IN HEDGE ACCOUNTING, NOMINAL AMOUNTS AND CARRYING AMOUNTS

Hedging instruments and effectiveness of hedging Nominal amount Carrying amount Changes in fair value Line on balance sheet used to measure the where the hedging hedge ineffectiveness for Assets Liabilities instrument is included the period Interest rate-related contracts Derivatives, positive values 1,350,000 10,730 Other assets - 1,731 Derivatives, negative values 500,000 1,313 Other liabilities - 184 Total 1,850,000 10,730 1,313 - 1,915

Ineffectiveness amounts to KSEK - 87 in the income statement item “Net income/expense from financial transactions”.

UNDERLYING RISK EXPOSURES HEDGED, CARRYING AMOUNT AND FAIR VALUE ADJUSTMENT AMOUNTS

Hedged items Accumulated adjustment Change in value Accumulated adjustment amount of fair value used to measure the amount of fair value hedging for the ineffectiveness of hedging where hedge Carrying amount hedged item hedging instruments for accounting is no longer Liabilities Liabilities the period applied Securities issued 1,853,309 3,309 1,828 –

The bank has no discontinued hedging relationships where the hedged item is still recognised in the balance sheet.

HEDGE INEFFECTIVENESS RECOGNISED IN 2019 INCOME STATEMENT, FAIR VALUE HEDGING OF INTEREST RATE RISK

Hedge ineffectiveness recognised Line in income statement containing recognised Fair value hedging in income statement hedge ineffectiveness Interest rate risk Securities issued 1,828 Net income/expense from financial transactions Hedging instruments Interest rate swaps - 1,915 Net income/expense from financial transactions

Hedging instruments consist of interest rate swaps for hedging interest rate risk. The hedged items consist of fixed-rate borrowing, and the hedged risk is the risk of change in the fair value as a result of changes in the swap rate. The hedging ratio is 1:1 because the hedged risk and the characteristics of the hedging instrument are identical. Hedging effectively protects the intended risk in the hedged items at transaction level, with an effectiveness within the range 80–125%. The bank evaluates effectiveness using the so- called dollar offset method based on accumulated changes in fair value. See also Note 3. Derivatives and hedge accounting, as well as the Market risk section in Note 2.

NOTE 28. PREPAID EXPENSES AND ACCRUED INCOME

31 Dec 2019 31 Dec 2018 Prepaid expenses 38,038 23,868 Accrued interest income 5,137 5,211 Other accrued income 24,071 21,664 Total 67,246 50,743

94 VOLVOFINANS BANK 2019 NOTES

NOTE 29. LIABILITIES TO CREDIT INSTITUTIONS AND SECURITIES ISSUED BREAKDOWN BY CURRENCY 2019 SEK NOK Total Liabilities to credit institutions 1,592,857 – 1,592,857 Securities issued 12,453,012 638,725 13,091,737 Total 14,045,869 638,725 14,684,594

2018 SEK NOK Total Liabilities to credit institutions 2,083,333 – 2,083,333 Securities issued 14,917,977 614,422 15,532,399 Total 17,001,310 614,422 17,615,732

For a breakdown by maturity, see the section Risk and capital management.

NOTE 30. RETAIL DEPOSITS AND BORROWINGS All deposits and borrowings are in SEK.

RETAIL DEPOSITS Deposits by customer category 31 Dec 2019 31 Dec 2018 Public sector 65 60 Corporate sector 3,636 16,359 Retail sector 20,519,353 17,135,362 of which, individual business owners (4,111,464) (3,356,536) Other 87 132 Total deposits 20,523,141 17,151,913

RETAIL BORROWINGS Borrowings by customer category 31 Dec 2019 31 Dec 2018 Corporate sector 693,594 1,066,453 Other – – Total borrowing 693,594 1,066,453 of which, Group companies (6,789) (6,789) of which, associates (257,718) (210,261) Total retail deposits and borrowings 21,216,735 18,218,366

NOTE 31. OTHER LIABILITIES

31 Dec 2019 31 Dec 2018 Negative value of derivatives 11,070 37,196 Trade payables 694,241 520,307 Liability to customer 109,067 113,007 Other liabilities 441,304 408,863 Total 1,255,682 1,079,373

NOTE 32. ACCRUED EXPENSES AND DEFERRED INCOME

31 Dec 2019 31 Dec 2018 Accrued interest expense 19,838 15,914 Other accrued expenses 113,536 100,662 Deferred income 1,172,679 1,186,408 Total 1,306,053 1,302,984

VOLVOFINANS BANK 2019 95 NOTES

NOTE 33. SUBORDINATED DEBTS

Carrying Carrying Currency Nominal Interest rate Maturity date amount 2019 amount 2018 STIBOR 90 + Debentures SEK 400,000 1.45% 11 Apr 2028 400,000 400,000 Total – – – – 400,000 400,000

Of which, associates – – – – – – Of which, Group companies – – – – – –

Debentures are subordinate to the bank’s other liabilities, which means that they confer entitlement to payment only after the other creditors have been repaid.

NOTE 34. UNTAXED RESERVES

31 Dec 2019 31 Dec 2018 Accumulated accelerated depreciation Opening balance, 1 January 4,128,190 3,629,711 Change for the year 498,268 498,479 Closing balance, 31 December 4,626,458 4,128,190

NOTE 35. EQUITY prices in an active market (Level 1) and using observable market data (Level 2). For specification of changes in equity, see statement of changes Loans and advances to customers have been calculated by in equity. discounting contractual cash flows at a discount rate that is based on a current lending spread (Level 2) in order to deter- DIVIDEND mine the fair value in accordance with IFRS 13. The dividend recognised during the year was KSEK 98,604 Liabilities to credit institutions, retail deposits and borrowing, and equates to SEK 98.60 per share. The Board of Directors securities issued and subordinated debts have been calculated proposes to the Annual General Meeting 2020 that no dividend based on estimated current lending spreads (Level 2) in order to be paid. determine the fair value in accordance with IFRS 13. Other categories belong to Level 3. For these assets and liabil- RETAINED EARNINGS ities the carrying amount is a good approximation of fair value Retained earnings in the bank comprise non-restricted equity for due to the short remaining maturity. the year after payment of any dividend. Retained earnings and profit for the year make up non-restricted equity, which is the Fair values are categorised at different levels in a fair value hier- amount that is available for distribution to the shareholders. archy based on inputs used in the valuation technique as follows: Level 1: according to prices quoted on an active market for NOTE 36. CARRYING AMOUNT BY identical instruments. CATEGORY OF FINANCIAL INSTRUMENT Level 2: based on directly or indirectly observable market data AND FAIR VALUE DISCLOSURES that is not included in Level 1. This category includes instru- METHODS FOR DETERMINING FAIR VALUE ments that are valued based on quoted prices on active markets Derivatives are recognised under other assets or other liabilities. for similar instruments, quoted prices for identical or similar As the bank’s derivatives are not quoted on an active market instruments traded on markets that are not active, or other (Level 1), the bank uses an analysis of discounted cash flows to valuation techniques where all significant inputs are directly and determine the fair value of the instruments in accordance with indirectly observable on the market. IFRS 13. Only observable market data is used for discounting Level 3: based on inputs that are not observable on the market. (Level 2). This category includes all instruments where the valuation tech- Chargeable treasury bills etc. as well as bonds and other nique covers inputs not based on observable data and where it debt securities have been measured at fair value in accordance has a material impact on the valuation. with IFRS 13 by being marked to market both using quoted

96 VOLVOFINANS BANK 2019 NOTES

Total Assets Total Carrying 2019 Level 1 Level 2 Level 3 Fair value amount Chargeable treasury bills, etc. 1,428,339 – – 1,428,339 1,429,949 Loans and advances to credit institutions – – 1,281,290 1,281,290 1,281,290 Loans and advances to customers – 17,286,480 – 17,286,480 17,278,081 Bonds and other debt securities 1,414,820 933,940 – 2,348,760 2,349,552 Other assets* – 11,022 925,020 936,042 936,042 Prepaid expenses and accrued income – – 67,246 67,246 67,246 Total 2,843,159 18,231,442 2,273,556 23,348,157 23,342,160

Total Liabilities Total Carrying 2019 Level 1 Level 2 Level 3 Fair value amount Liabilities to credit institutions – 1,611,386 – 1,611,386 1,592,857 Retail deposits and borrowings – 21,216,735 – 21,216,735 21,216,735 Securities issued – 13,202,874 – 13,202,874 13,091,737 Other liabilities* – 11,070 1,244,612 1,255,682 1,255,682 Accrued expenses and deferred income – – 1,306,053 1,306,053 1,306,053 Subordinated debts – 403,205 – 403,205 400,000 Total – 36,445,270 2,550,665 38,995,935 38,860,064

Total Assets Total Carrying 2018 Level 1 Level 2 Level 3 Fair value amount Chargeable treasury bills, etc. 1,243,806 – – 1,243,806 1,245,816 Loans and advances to credit institutions – – 1,622,571 1,622,571 1,622,571 Loans and advances to customers – 16,907,161 – 16,907,161 16,922,760 Bonds and other debt securities 1,430,656 800,260 – 2,230,916 2,231,967 Other assets* – 12,999 874,129 887,128 887,128 Prepaid expenses and accrued income – – 50,743 50,743 50,743 Total 2,674,462 17,720,420 2,547,443 22,942,325 22,960,985

Total Liabilities Total Carrying 2018 Level 1 Level 2 Level 3 Fair value amount Liabilities to credit institutions – 2,070,608 – 2,070,608 2,083,333 Retail deposits and borrowings – 18,218,341 – 18,218,341 18,218,366 Securities issued – 15,581,404 – 15,581,404 15,532,399 Other liabilities* – 37,196 1,042,178 1,079,373 1,079,373 Accrued expenses and deferred income – – 1,302,984 1,302,984 1,302,984 Subordinated debts – 391,703 – 391,703 400,000 Total – 36,299,252 2,345,162 38,644,413 38,616,455

* The financial instruments which the bank measures at fair value in the balance sheet are derivatives.

VOLVOFINANS BANK 2019 97 NOTES

FINANCIAL INSTRUMENTS THAT ARE NETTED IN THE BALANCE SHEET OR ARE SUBJECT TO NETTING AGREEMENTS Volvofinans Bank enters into derivates under International Swaps and Derivatives Association (ISDA) master agreements. No amounts have been netted in the balance sheet. For derivatives entered into after 1 March 2017, Volvofinans Bank receives and provides collateral in the form of bank deposits in accordance with the standard terms of the ISDA Credit Support Annex. The assets for derivatives amount to SEK 11 million and the liabilities to SEK 11.1 million. At 31 December 2019, the bank had received collateral of SEK 8.5 million and provided collateral of SEK 18.2 million.

CARRYING AMOUNTS BY CATEGORY

Financial assets Assets recognised at Derivatives in 31 Dec 2019 amortised cost hedge accounting Other assets* Total Fair value Chargeable treasury bills, etc. 1,429,949 – – 1,429,949 1,428,339 Loans and advances to credit institutions 1,281,290 – – 1,281,290 1,281,290 Loans and advances to customers 17,278,081 – – 17,278,081 17,286,480 Bonds and other debt securities 2,349,552 – – 2,349,552 2,348,760 Shares and interests in associ- ates and other companies – – 11,258 11,258 – Shares and interests in Group companies – – 6,742 6,742 – Intangible assets – – 15,060 15,060 – Property, plant and equipment, fixtures and fittings – – 12,133 12,133 – Property, plant and equipment, lease assets – – 20,648,640 20,648,640 – Other assets 701,270 10,730 224,042 936,042 936,042 Prepaid expenses and accrued income 67,246 – – 67,246 67,246 Total assets 23,107,388 10,730 20,917,875 44,035,993

Liabilities Non-financial Derivatives in Other financial 31 Dec 2019 liabilities hedge accounting liabilities** Total Fair value Liabilities to credit institutions – – 1,592,857 1,592,857 1,611,386 Retail deposits and borrowings – – 21,216,735 21,216,735 21,216,735 Securities issued – – 13,091,737 13,091,737 13,202,874 Other liabilities 441,304 1,313 813,065 1,255,682 1,255,682 Accrued expenses and deferred income 1,286,215 – 19,838 1,306,053 1,306,053 Subordinated debts – – 400,000 400,000 403,205 Total liabilities 1,727,519 1,313 37,134,232 38,863,064

* Derivatives not designated as hedging instruments are included in the row other assets and total KSEK 293. ** Derivatives not designated as hedging instruments are included in the row other liabilities and total KSEK 9,757.

98 VOLVOFINANS BANK 2019 NOTES

Financial assets Assets recognised at 31 Dec 2018 amortised cost Derivatives Other assets* Total Fair value Chargeable treasury bills etc. 1,245,816 – – 1,245,816 1,243,806 Loans and advances to credit institutions 1,622,571 – – 1,622,571 1,622,571 Loans and advances to cus- tomers 16,922,760 – – 16,922,760 16,907,161 Bonds and other debt securities 2,231,967 – – 2,231,967 2,230,916 Shares and interests in associ- ates and other companies – – 23,777 23,777 – Shares and interests in Group companies – – 6,742 6,742 – Intangible assets – – 21,545 21,545 – Property, plant and equipment, fixtures and fittings – – 6,488 6,488 – Property, plant and equipment, lease assets – – 20,357,024 20,357,024 – Other assets 735,720 12,898 138,510 887,128 887,128 Prepaid expenses and accrued income 50,743 – – 50,743 50,743 Total assets 22,809,577 12,898 20,554,086 43,376,561

Liabilities Non-financial Derivatives in Other financial 31 Dec 2018 liabilities hedge accounting liabilities** Total Fair value Liabilities to credit institutions – – 2,083,333 2,083,333 2,070,608 Retail deposits and borrowings – – 18,218,366 18,218,366 18,218,341 Securities issued – – 15,532,399 15,532,399 15,581,404 Other liabilities 398,824 1,408 679,141 1,079,373 1,079,373 Accrued expenses and deferred income 1,287,069 – 15,915 1,302,984 1,302,984 Subordinated debts – – 400,000 400,000 391,703 Total liabilities 1,685,893 1,408 36,929,154 38,616,455

* Derivatives not designated as hedging instruments are included in the row other assets and total KSEK 100. ** Derivatives not designated as hedging instruments are included in the row other liabilities and total KSEK 35,788.

NOTE 37. PLEDGED ASSETS AND CONTINGENT LIABILITIES

2019 2018 Pledged assets – – Contingent liabilities – –

In 2018, Volvofinans Bank AB charged SEK 45.4 million to the income statement in the “Other operating expenses item”. This figure corresponds to the difference between the Swedish Tax Agency’s adjusted revenue-based method and the bank’s time-based calculation method applied in previous years. Volvo Finans Bank AB is still contesting the Swedish Tax Agency’s decision to reject the deductions for input VAT and appealed to the Administrative Court in autumn 2018. In December 2019, the Administrative Court rejected the bank’s appeal. In January 2020, the ruling was appealed to Administrative Court of Appeal.

VOLVOFINANS BANK 2019 99 NOTES

NOTE 38. OPERATING LEASES OPERATING LEASES WHERE THE BANK IS THE LESSEE

Expensed payments for operating leases amount to:

2019 2018 Annual lease payments 14,634 11,333 – Of which minimum lease payments 14,008 10,694 – Of which variable payments 626 639

The future non-cancellable lease payments are as follows:

2019 2018 Within 1 year 14,624 12,979 Between 1–3 years 29,201 27,030

Operating leases are mainly attributable to agreements typical for the business, relating to the cost of office space and office equipment.

NOTE 39. SUBSEQUENT EVENTS While the recent outbreak of the novel coronavirus (COVID-19) makes it difficult to assess the outlook for the Swedish economy, the outbreak had not had a material impact on the bank’s financial position, earnings or cash flow at the time of publication of this annual report. The Board of Directors proposes that the dividend proposed to the AGM 2020, as previously communicated in the year-end report, not be paid. This has had an impact on the bank’s capital base, which has increased. The key ratios capital ratio, Common Equity Tier 1 capital ratio and leverage ratio have thereby also increased.

NOTE 40. RELATED PARTIES The Swedish Volvo dealerships own 50% of the bank via their holding company AB Volverkinvest, while Volvo Personvagnar AB owns 50% with both owners classified as other related companies.

The bank has holdings in four companies classified as associates, see Note 22. The Group also includes wholly-owned and dormant subsidiaries: Volvofinans Leasing AB, Autofinans Nordic AB, CarPay Sverige AB and Volvofinans IT AB, see Note 23.

Group companies Associates Other related companies Balance sheet 2019 2018 2019 2018 2019 2018 Assets 6,742 6,742 22,763 24,689 1,227,996 1,260,708 Liabilities 6,789 6,789 262,102 214 948 118,207 295,532

Income statement 2019 2018 2019 2018 2019 2018 Interest income – – 815 478 6 23 Lease income – – – – 342,630 343,707 Interest expense – – - 52 - 27 - 20 - 38 Commission income – – – – 1,776 1,938 Other operating income – – 3,426 1,077 – – Total – – 4,189 1,528 344,392 345,630

100 VOLVOFINANS BANK 2019 NOTES

NOTE 41. SPECIFICATION TO CASH FLOW STATEMENT

2019 2018 The following components are included in cash equivalents: Loans and advances to credit institutions 1,281,290 1,622,571 Total 1,281,290 1,622,571

31 Dec 2019 31 Dec 2018 Interest paid and dividends received included in cash flow from operating activities: Dividend received 308 16,352 Interest received 539,714 477,283 Interest paid 315,481 240,784

Cash and cash equivalents included in the cash flow statement are defined in accordance with IAS 7 and they do not coincide with what the bank regards as liquidity.

VOLVOFINANS BANK 2019 101 SIGNATURES OF THE BOARD OF DIRECTORS

The Board of Directors and CEO warrant that the annual report has been prepared in accordance with generally accepted accounting policies in Sweden.

The annual report gives a true and fair view of the bank’s financial position and results. The Directors’ report gives a true and fair overview of the development of the bank’s business, position and results, and describes significant risks and uncertainties faced by the bank.

The annual report has, as stated above, been approved for publication by the Board of Directors.

Gothenburg, 29 March 2020

Urmas Kruusval Chairman of the Board

Synnöve Trygg Per Avander Kristian Elvefors Vice Chairman of the Board Director Director

Ann Hellenius Elisabeth Mosséen Björn Rentzhog Director Director Director

Conny Bergström CEO

We submitted our audit report on 29 March 2020

KPMG AB

Mikael Ekberg Authorised Public Accountant

102 VOLVOFINANS BANK 2019 VOLVOFINANS BANK 2019 103 Auditor’s report

To the Annual General Meeting of Volvofinans Bank AB (publ), corp. ID no. 556069-0967

Report on the financial statements

Opinions We have audited the financial statements of Volvofinans Bank AB (publ) for 2019 with the exception of the Corporate Governance Report on pages 14–21 and the Sustainability Report on pages 22–23. The company’s financial statements are included on pages 12–102 of this document. In our opinion, the financial statements have been prepared in accordance with the Swedish Annual Accounts Act for Credit Institutions and Securities Companies and presents fairly, in all material respects, the financial position of Volvofinans Bank AB (publ) as at 31 December 2019, and its financial performance and cash flows for the year then ended in accordance with the Swedish Annual Accounts Act for Credit Institutions and Securities Companies. Our opinions do not cover the Corporate Governance Report on pages 14–21 or the Sustainability Report on pages 22–23. The Directors’ Report is consistent with the other parts of the annual report. We therefore recommend that the Annual General Meeting adopt the income statement and balance sheet. Our opinions on these financial statements are consistent with the content in the supplementary report that has been submitted to the Audit Committee in accordance with Article 11 of Regulation (EU) No 537/2014.

Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISA) and generally accepted auditing standards in Sweden. Our responsi- bilities under these standards are further described in the section Auditor’s responsibilities. We are independent in relation to Volvofinans Bank AB (publ) in accordance with good auditing practices in Sweden and have fulfilled our ethical responsibilities in accordance with these requirements. This means that, based on our best knowledge and beliefs, no prohibited services as defined in Article 5(1) of Regulation (EU) No 537/2014 have been provided to the audited company, its parent or its controlling companies within the EU. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements for the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Provision for expected credit losses See accounting policies in Note 3.19 and Note 20 for detailed disclosures and a description of this key audit matter.

Description of the key audit matter How our audit addressed the key audit matter The bank’s loans and advances to customers mainly consist of card We evaluated that the bank’s key controls have been appropriate and credits and car loans, with the item amounting to SEK 17,278 million as at effective in the process to monitor the inputs, calculation and follow-up 31 December 2019, which corresponds to approx. 39% of the bank’s total of the outcome from the credit provisions. assets. The bank’s provision for expected credit losses amounts to SEK Supported by our specialists in credit risk modelling, we evaluated the 25 million (previous year SEK 24.2 million). validation that the bank has implemented for expected credit losses The model for provision for expected credit losses is based on the relating to account credits in the household segment. financial reporting standard IFRS 9. The model is based on a collective We also performed random sampling to evaluate inputs to credit assessment basis in which the credits are divided into three stages provision models and the accuracy of calculations. based on assessed credit risk. We also evaluated the completeness and accuracy of the underlying This is regarded as a key audit matter because it involves complex facts disclosed in the information attributable to the provision for calculations and significant judgements in order to establish the size of expected credit losses in the annual statements in order to judge the provision for expected credit losses. compliance with the IFRS disclosure requirements. Complex calculations and significant judgements include the interpretation of the requirements reflected in the bank’s model for calculating expected credit losses, the establishment of a significant increase in credit risk, the establishment of credit-impaired loans, and the valuation of expected credit losses, which occurs through a complex calculation for each individual credit exposure where the bank also takes into account macroeconomic variables.

104 VOLVOFINANS BANK 2019 Impairment of operating lease assets See Accounting policies in Note 3.22 and other related disclosures on impairment in Note 25 for detailed disclosures and a description of the area.

Description of the key audit matter How our audit addressed the key audit matter The carrying amount of the company’s operating leases, which are directly We assessed the appropriateness of the company’s procedures for guaranteed by Volvofinans Bank AB (publ), as at 31 December 2019 stood impairment of assets used under operating leases. at SEK 4,336 million, which corresponds to approx. 9.8% of the company’s We evaluated the completeness and accuracy of inputs to the model total assets. The company recognised impairment losses of SEK 56.4 and tested the accuracy of calculations of the residual value. million (previous year SEK 73.9 million). Furthermore, we assessed the reasonableness of the data on residual The bank continuously assesses assets used operating leases for impair- values obtained from an external supplier and verified that the risk level ment. Impairment occurs if the carrying amount is higher than the recover- in the residual value risk has been approved and reported to the Board able amount, which is the higher of the fair value less costs to sell or the in accordance with the bank’s internal instructions. value in use. Value in use is determined as the present value of remaining rents and the present value of the expected residual value. Assessment of We also evaluated the completeness and accuracy of the underlying the expected residual value is obtained from an external supplier. facts and circumstances disclosed in the information in the finan- cial statements and made a judgement on whether the scope of the This is regarded as a key audit matter because the calculation of the resid- information is sufficient to judge compliance with the IFRS disclosure ual value includes significant judgements of the expected residual value for requirements. each operating lease.

Information other than the financial statements is materially inconsistent with the financial statements. In this review we also take into account the knowledge we have obtained in the audit and assess This document also contains information other than that in the financial whether the information otherwise appears to contain material misstate- statements and which can be found on pages 1–11 and 14–23. ments. Our opinion on the financial statements does not include this information and If, based on the work carried out with respect to this information, we con- we will not express an opinion verifying this other information. clude that there is a material misstatement in the other information, we are In connection with our audit of the financial statements, it is our responsibility required to report this. We have nothing to report in this respect. to read the information identified above and identify whether the information

The Board of Directors’ and Chief Executive Officer’s responsibility The Board of Directors and CEO are responsible for the preparation and ditions that may affect the ability to continue as a going concern and to use fair presentation of the financial statements in accordance with the Swedish the going concern basis of accounting. However, the going concern basis of Annual Accounts Act for Credit Institutions and Securities Companies. The accounting is not used if the Board of Directors and CEO intend to liquidate Board of Directors and CEO are also responsible for such internal control as the company, discontinue operations or do not have a realistic alternative to they determine is necessary to enable the preparation of financial statements either of these actions. that are free from material misstatement, whether due to fraud or error. The Board’s Audit Committee shall, without prejudice to the Board’s re- In the preparation of the financial statements, the Board of Directors and sponsibilities and tasks in other respects, among other things, monitor the CEO are responsible for assessment of the company’s ability to continue company’s financial reporting. as a going concern. They disclose, where appropriate, information on con-

Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the audit procedures responsive to those risks, and obtain audit evi- financial statements as a whole are free from material misstatement, dence that is sufficient and appropriate to provide a basis for our whether due to fraud or error, and to issue an auditors’ report that includes opinion. The risk of not detecting a material misstatement resulting our opinion. Reasonable assurance is a high level of assurance, but is from fraud is higher than for one resulting from error, as fraud may not a guarantee that an audit conducted in accordance with International include collusion, forgery, intentional omissions, misrepresenta- Standards on Auditing (ISAs) and generally accepted auditing standards tions, or the override of internal control. in Sweden will always detect a material misstatement when it exists. ––– obtain an understanding of the part of the company’s internal control Misstatements can arise from fraud or error and are considered material relevant to our audit in order to design audit procedures that are ap- if, individually or in the aggregate, they could reasonably be expected to propriate in the circumstances, but not for the purpose of expressing influence the economic decisions of users taken on the basis of these an opinion on the effectiveness of the internal control. financial statements. –––  evaluate the appropriateness of accounting policies used and the rea- As part of an audit in accordance with ISAs, we exercise professional sonableness of accounting estimates and related disclosures made by judgement and maintain professional scepticism throughout the audit. the Board of Directors and the CEO. We also: ––– identify and assess the risks of material misstatement in the finan- cial statements, whether due to fraud or error, design and perform

Auditor’s report, Volvofinans Bank AB (publ), corp. ID no. 556069-0967, 2019 VOLVOFINANS BANK 2019 105 ––– conclude on the appropriateness of the Board of Directors’ and CEO’s We must inform the Board of, among other matters, the planned scope, use of the going concern basis of accounting when preparing the nature and timing of the audit. We must also inform the Board of significant financial statements. We also make a conclusion based on the audit audit findings, including any significant deficiencies in internal control that evidence obtained, whether a material uncertainty exists related to we have identified. events or conditions that may cast significant doubt on the company’s We must also provide the Board with a statement that we have complied and the Group’s ability to continue as a going concern. If we conclude with relevant ethical requirements regarding independence and communi- that a material uncertainty exists, we are required to draw attention in cate all relationships and other matters that may reasonably be thought to the auditors’ report to the related disclosures in the financial statements bear on our independence and, where applicable, related safeguards. or, if such disclosures are inadequate, to modify our opinion on the financial statements. Our conclusions are based on the audit evidence From the matters communicated with the Board, we determine those mat- obtained up to the date of the auditor’s report. However, future events ters that were of most significance in the audit of the financial statements, or conditions may cause the company to cease to continue as a going including the most significant assessed risks of material misstatement and concern. which therefore constitute the key audit matters. We describe these areas in the audit report unless laws or regulations prevent disclosure of the ––– evaluate the overall presentation, structure and content of the finan- issue. cial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

Report on other statutory and regulatory requirements

Opinions In addition to our audit of the financial statements, we audited the Board of Directors’ and Chief Executive Officer’s administration of Volvofinans Bank AB (publ) for 2019 and the proposed appropriation of the company’s profit or loss. We recommend to the Annual General Meeting that the profit be appropriated as proposed in the Directors’ Report and that the members of the Board and the Chief Executive Officer be discharged from liability for the financial year.

Basis for opinion We have conducted our audit in accordance with generally accepted auditing standards in Sweden. Our responsibility in accordance with this is described in greater detail in the section Auditor’s responsibilities. We are independent in relation to Volvofinans Bank AB (publ) in accordance with good auditing practices in Sweden and have fulfilled our ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

The Board of Directors’ and Chief Executive Officer’s responsibility The Board of Directors is responsible for the proposed appropriation The CEO must take charge of the day-to-day management in accord- of the company’s profit or loss. Dividend proposals include an assess- ance with the Board’s guidelines and directives, including taking the ment of whether the dividend is justifiable considering the demands necessary measures to ensure that the company’s accounting records that the nature, scope and risks of the company’s operations place on are complete according to law and that asset management is conducted the amount of equity and the company’s consolidation requirements, satisfactorily. liquidity and financial position in general. The Board is responsible for the organisation of the company and the management of its affairs. Among other things, this includes continuously assessing the company’s financial position and ensuring that the com- pany’s organisation is designed such that controls of accounting records, asset management and the company’s financial circumstances in general are performed in a satisfactory manner.

106 VOLVOFINANS BANK 2019 Auditor’s responsibilities

Our objective for the management audit, and thereby our statement on that a proposal for appropriation of the company’s profit or loss is inconsist- discharge from liability, is to obtain audit evidence to enable us to determine ent with the Swedish Companies Act. with reasonable assurance whether any member of the Board or the CEO As part of an audit in accordance with generally accepted auditing has, in any material respect: standards in Sweden, we exercise professional judgement and maintain –––  taken any action or been guilty of any negligence that may result in a professional scepticism throughout the audit. The review of the manage- claim for compensation being brought against the company, or ment and the proposed appropriation of the company’s profit or loss is largely based on the audit of the accounts. Any additional audit proce- ––– in any other way acted in contravention of the Swedish Companies dures performed are based on our professional assessment, with risk and Act, the Swedish Banking and Financing Business Act, the Swedish materiality as the starting point. This means that our review focuses on Annual Accounts Act for Credit Institutions and Securities Companies such procedures, matters and conditions that are material to the business or the Articles of Association. and where deviation and infringement would have special significance for Our objective for the audit of the proposed appropriation of the company’s the company’s situation. We go through and examine decisions taken, profit or loss, and thereby our opinion on this matter, is to determine with documentation supporting decisions, actions taken and other conditions reasonable assurance whether the proposal is consistent with the Swedish that are relevant to our statement on discharge from liability. As a basis Companies Act. for our opinion on the Board of Directors’ proposal for appropriation of the Reasonable assurance is a high level of assurance, but is not a guarantee company’s profit or loss, we have examined the Board of Directors’ rea- that an audit conducted in accordance with generally accepted auditing soned opinion and a selection of evidence for this in order to determine standards in Sweden will always detect actions or omissions which may whether the proposal is consistent with the Swedish Companies Act. result in a claim for compensation being brought against the company, or

Auditor’s review of the Corporate Governance Report The Board of Directors is responsible for the Corporate Governance Report on pages 14-21 and for ensuring that it has been prepared in accordance with the Swedish Annual Accounts Act. Our review has been carried out in accordance with FAR’s statement RevU 16 Auditors’ review of the corporate governance report. This means that our review of the Corporate Governance Report has a different aim and is of significantly smaller scope than the aim and scope of an audit in accordance with the International Standards on Auditing and generally accepted auditing standards in Sweden. We believe that this review provides sufficient grounds for our opinions. A corporate governance report has been prepared. Disclosures in accordance with Chapter 6, Section 6, paragraph 2, items 2-6 of the Swedish Annual Accounts Act and Chapter 7, Section 31(2) of the same Act are consistent with the other parts of the annual report and are in compliance with the Swedish Annual Accounts Act for Credit Institutions and Securities Companies.

Auditor's opinion on the statutory sustainability report The Board of Directors is responsible for the Sustainability Report on pages 22–23 and for ensuring that it has been prepared in accordance with the Swedish Annual Accounts Act. We conducted our audit in accordance with FAR's auditing standard RevR. 12 The auditor´s opinion regarding the statutory sustainability report. This means that our review of the Sustainability Report has a different aim and is of significantly smaller scope than the aim and scope of an audit in accord- ance with the International Standards on Auditing and generally accepted auditing standards in Sweden. We believe that this review provides sufficient grounds for our opinion. A sustainability report has been prepared.

KPMG AB, PO Box 11908, SE-404 39, Gothenburg, was appointed as the auditor for Volvofinans Bank AB (publ) at the Annual General Meeting on 12 June 2019. KPMG AB or auditors working at KPMG AB have been the company’s auditor since 1983.

Gothenburg, 29 March 2020 KPMG AB

Mikael Ekberg Authorised Public Accountant

Auditor’s report, Volvofinans Bank AB (publ), corp. ID no. 556069-0967, 2019 VOLVOFINANS BANK 2019 107 108 VOLVOFINANS BANK 2019 VOLVOFINANS BANK 2019 109 BOARD OF DIRECTORS, AUDITOR AND SENIOR EXECUTIVES

BOARD OF DIRECTORS DEPUTY BOARD MEMBERS SENIOR EXECUTIVES

Urmas Kruusval Pascal Bellemans Conny Bergström Chairman of the Board Vice President, Head of Volvo Car CEO Financial Services Synnöve Trygg Hans Jörgen Möller Deputy Chairman of the Board Jonas Estéen COO CEO and owner of Bilkompaniet Per Avander Mora Leksand Malung AB Christian Torgersson CEO, AB Bilia CFO Janola Gustafson Kristian Elvefors Chairman of the Volvo Dealers Association Marianne Moberg CEO of Volvo Car UK CIO Anders Gustafsson Ann Hellenius Head of Volvo Car Americas Region Gunnar Ekeroth Director Chief Risk Officer

Elisabeth Mossén Andreas Bondesson Group Treasurer Volvo Cars AUDITOR Chief Credit Officer

Björn Rentzhog Mikael Ekberg Björn Stenport CEO and President, AB Persson Invest Authorised Public Accountant General Counsel

Joel Graffman Marketing & Sales Director, Cars

Johan Linder Marketing & Sales Director, Fleet

Per Lindahl Marketing & Sales Director, Trucks

Margareta Johansson Director of Human Resources

110 VOLVOFINANS BANK 2019

circusreklam.se

Volvofinans Bank AB (publ) • Corp. ID no. 556069-0967 Bohusgatan 15 • Box 198 • SE-401 23 Göteborg Tel: +46 (0)31-83 88 00 • www.volvofinans.se